What does it mean when a currency is "devalued"?

When a currency is "devalued," it means that its value has been reduced in comparison to other currencies. This signifies that it takes more of the devalued currency to purchase a unit of foreign currency. A devaluation typically occurs under a fixed exchange rate system and is often a policy decision made by a country's government or monetary authority when they want to improve their trade balance by making exports cheaper and imports more expensive.

When a currency is devalued, it may stimulate exports because goods priced in the devalued currency become less expensive for foreign buyers, possibly leading to an increase in demand for those goods. Conversely, imports become more expensive for domestic consumers, potentially decreasing their demand for foreign products. This shift in pricing can contribute to correcting trade imbalances and influencing economic activity.

This understanding is essential in the context of international trade and economics, as currency fluctuations have significant impacts on trade policies and economic relationships between countries.