What the Terms Revaluation and Devaluation Mean

The terms revaluation and devaluation are used instead of appreciation and depreciation, respectively. When you read any financial newspaper, you note that a weakening in the dollar is reported as depreciation of the dollar. But if the same happens to the Chinese yuan, it’s phrased as the yuan being devalued. Professional people use a certain language, and it’s important to understand and use this language.

However, to use the terms revaluation or devaluation, you need substantial government interventions in the exchange rate. The Chinese yuan is a good example for a currency whose value with respect to other currencies is determined by the Chinese government. The goal is to identify devaluation and revaluation, for example, on a graph.

The figure shows the yuan–dollar annual exchange rate for the period 1981–2011. The yuan–dollar exchange rate was CNY1.71 per dollar in 1981 and then steadily increased until 1994, when it reached CNY8.6397. Between 1994 and 2005, the yuan–dollar exchange rate remained above CNY8 per dollar.

Beginning in 2005, the exchange rate declined, from CNY8.1936 in 2005 to CNY6.4630 in 2011. In the graph, you can use this information to calculate the percent change in the Chinese yuan and apply your knowledge of the terminology associated with the change in the exchange rate.

[Credit: Notes: FRED, St. Louis Federal Reserve Bank. The data are available at http://research.stl
Credit: Notes: FRED, St. Louis Federal Reserve Bank. The data are available at http://research.stlouisfed.org/fred2/series/AEXCHUS?cid=32219.

Consider the period of 1981–1994:

image1.jpg

Here, E stands for the yuan–dollar exchange rate. A 405 percent increase in the yuan–dollar exchange rate is shown over a period of 14 years, which translates into an average annual devaluation of the yuan of almost 29 percent (405 / 14).

Now apply the percent change formula to the 2005–2011 period:

image2.jpg

This result indicates an average annual decline in the number of yuan necessary to buy one dollar of about 3.02 percent in the past seven years (21.12 / 7), which is called a revaluation.

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