Question

Differentiate between devaluation and depreciation.

Distinguish between the depreciation of currency and devaluation of a currency.

How is Devaluation of currency different from Depreciation of currency? Give any two differences.

Answer 1

Devaluation	Depreciation
It occurs when the currency exchange rate is officially lowered under fixed exchange rate system.	When the value of currency falls as compared to other currencies, it is known as depreciation.
It exists under fixed exchange rate.	It exists under flexible exchange rate.
It is due to government’s decision	It is due to the demand and supply forces.

Answer 2

The difference between the depreciation of currency and devaluation of the currency is given as follows:

Basis	Depreciation	Devaluation
Definition	Currency depreciation implies that domestic currency has become less expensive in terms of foreign currency.	Devaluation of a currency occurs when the currency exchange rate is officially lowered by the monetary authority.
Exchange rate system	This is possible in a flexible exchange rate system	This is possible in a fixed exchange rate system