What happens when a currency is devalued?

The devaluation of currency can only happen when a nation
has been keeping its currency at a fixed exchange rate.  For example, if Mexico keeps
its peso at, for example, 15 pesos to the dollar, that is a fixed exchange rate.  In
such a case, a government can devalue its currency by changing the rate and making its
money worth less.  In this example, the Mexican government could change the exchange
rate and say that the peso is now worth less -- 30 pesos to the
dollar.

One major impact of such a move is that the
country's exports become cheaper for people in other countries to buy.  This is often
seen as a reason to devalue -- to allow your country's exporters to sell more goods
abroad.

There are many other impacts, though, and not all
of them are good.  For example, devaluation can result in a huge loss of confidence
among the citizens of the country that devalues its currency.  Please follow the link
for a thorough discussion of various impacts of devaluation.