what is meant by devaluationof domestic currency - Economics - Open Economy Macroeconomics

Question

what is meant by devaluationof domestic currency?

Amit Chatterjee · Accepted Answer

Devaluation of the domestic currency implies that the domestic currency (say Rupees) has become less expensive in terms of foreign currency (say US Dollar). For example:

If today US$ 1 is Rs 50, then compared to what it was yesterday (US$ 1 = Rs 45), then Indian rupees has devalued.

Exchange Rate	Value of Re 1 in terms of US$	Change
USD 1 = Rs 45	$\frac{1}{45} = 0.022$
USD 1 = Rs 50	$\frac{1}{50} = 0.020$	Indian rupee devalued as the value of rupees in terms of dollar fell from 0.022 to 0.020

Devaluation of currency takes place under Fixed Exchange Rate System. Nowadays, instead of devaluation, depreciation of currency takes place. What we have today as an Exchange Rate Determination System is Flexible Exchange Rate System. This system is market determined. In short, devaluation is associated with Fixed Exchange Rate System while Depreciation is related to Flexible Exchange Rate System.