Revaluation: An increase in the value of a currency in a fixed exchange rate system
Revaluation is an official increase in the value of a nation’s currency within a fixed exchange rate system. Unlike floating currencies that change daily, a revalued currency is reset by the central bank. This article explains the mechanics, causes, and effects of revaluation, using real‑life examples. You will learn how it affects exports, imports, and people’s purchasing power — from middle school basics to high‑school level analysis.
🔹 1. Fixed vs. floating: where revaluation lives
In a floating system, supply and demand set the price — like a seesaw. In a fixed system, the government pegs its currency to another (e.g., the US dollar). Revaluation is the official upward adjustment of that peg. For example, if 1 USD = 3.70 dinars and the government changes it to 1 USD = 3.20 dinars, the dinar has been revalued.
🔹 2. Why do countries revalue?
Nations revalue to fight imported inflation, calm an overheated economy, or respond to pressure from trading partners. Imagine a country that exports oil and imports food. If world oil prices soar, money floods in. To prevent the economy from overheating, the central bank may revalue — making imports cheaper and cooling down export frenzy.
After revaluation, the domestic currency buys more foreign goods. If a phone costs $500 and the exchange rate changes from $1 = 4.00 crowns to $1 = 3.50 crowns, the price in crowns falls: 500 × 4.00 = 2,000 crowns → 500 × 3.50 = 1,750 crowns. Citizens save 250 crowns!
🔹 3. Winners & losers – a clear comparison
| Group | Effect | Why? |
|---|---|---|
| Importers & consumers | ✅ Gain (cheaper imports) | Each unit of local currency buys more foreign currency. |
| Exporters & tourism | ❌ Lose (foreigners pay more) | Foreign buyers need more of their currency to buy the same product. |
| Central bank reserves | ⚖️ Mixed (value of reserves falls) | Foreign assets held are worth less in domestic currency. |
🌍 Revaluation in action: China 2005–2015
For years, China pegged the yuan tightly to the US dollar. Trading partners said the yuan was undervalued, making Chinese exports too cheap. In 2005, China revalued the yuan by 2.1% and then let it rise slowly. A Chinese toy that cost $10 in New York became slightly more expensive, but Chinese consumers found American movies and laptops cheaper. The revaluation was a tool to rebalance trade and calm inflation.
❓ Important questions about revaluation
No. Appreciation happens naturally in a floating system; revaluation is a deliberate government decision in a fixed system. Both mean “the currency becomes stronger”, but the cause is different.
Yes. If the currency becomes too strong, exporters cannot sell abroad. Factories may close and unemployment rises. That is why revaluation steps are usually tiny — sometimes just 0.5% or 1%.
Devaluation — an official decrease in the value of the currency. It makes exports cheaper and imports more expensive. Countries often devalue to boost tourism or local manufacturing.
Revaluation is a powerful but delicate tool. It helps control inflation and rewards consumers with cheaper imports. However, it puts pressure on domestic producers who compete internationally. Understanding revaluation helps us see how governments manage the economy — not just through laws, but through the very value of the money we use every day.
📌 Footnote
[1] Fixed exchange rate system: A regime where a currency’s value is tied to another currency or a basket of currencies.
[2] Purchasing power: The quantity of goods/services that one unit of money can buy.
[3] Central bank: The national institution that manages the currency, money supply, and interest rates.
[4] Peg: To fix or “nail” the exchange rate at a specific level.