General Knowledge - Indian Economy - Discussion

Devaluation is a measure taken by government to reduce the value of home currency in comparison to other countries. This makes home currency cheaper and foreign currency more costlier.

The main purpose of devaluation is to correct BOP deficit when the country have more imports than exports. As currency value decreases as a result of devaluation, it will be more costlier to import from foreign. On the otherhand devaluation will encourage other countries to import more. This means import will fall export rise.

Thus, Devaluation may lead to BOP equilibrium by equalizing exports and imports.

=> 1st case [1 $ = 70 Rs.]
1 pen price = 70 Rs. = 1 dollar, sold for 1.2 $ => profit =0.2 $.

=> 2nd case [1 $ = 100 Rs.]
1 pen price = 70 Rs. = 0.7 $, sold for 1.2 $ => profit =0.5$.

=> More profit when the price of exports remains constant.

Devalue is the reduction in the value of the currency, if the export remains constant then it will not increase the surplus of the country (not beneficial for the growth).

However, to increase the surplus, country has to increase the export volume and moreover, it will impact on deficit.

Devaluation of a currency is more successful price elasticity demand is proportional then only devaluation of a currency will success other wise it will fail.

No, I think the devaluation of currencies boosts the export. China do this.

Devaluation of domestic currency is a deliberate step taken by the Government mainly to reduce the value of domestic currency against the king currencies of the world. It is to be ratified by the International Monetary Fund (IMF). The purpose is to boost the exports to correct the fundamental disequilibrium in balance of payments. At that time, the prices of exports must remain the same. Let us discuss with an illustration. For example if Indian currency is devalued against American dollar, the value of American dollar in terms of Indian currency would go up. By keeping the export price constant, Americans could now be able to purchase more of Indian goods in foreign trade (because the value of American currency has relatively increased). This would be possible only if the export price remains constant. If it doesn't remain constant, the value of American currency will become flexible and will not respond to decrease in value of Indian currency. As a result, the purpose will not be served. Simultaneously, the value (price) of American goods would be more costlier to Indians. This will help to reduce imports. This is possible only in liberal trade conditions and therefore the policy of protection should not apply. There should be no retaliatory measure from the opposite side. Hence the prices of exports remain constant.

Hence devaluation is beneficial for export-oriented countries. So it will be more beneficial if the export price of a commodity reduces in comparison to other countries as this will reduce the price of a commodity in the foriegn market.

Because of devaluation, the import prices will increase and the export price will become lower.

Beneficially mean get something more than calculated profit on certain type of trade transaction. Here net-off of two type of trade asked import and export both.

So, its beneficial if price of export remain same i.e. production cost remain same even though its depend on import item.

By doing devaluation Forex reserves may rise as export price remains constant.