General Knowledge - Indian Economy - Discussion

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.

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.

Devaluation is nothing but reducing in the value of current money this is taken to discourage imports and increase exports. For ex devaluation gives two sides benefits it helps to make profit and discourage imports for ex if the value of rupee is 50 after devaluation it decrease to 45 then to purchase the goods we need spend more money because the value of money is more in other country so it tries to reduce its imports to have control on the outflow of the domestic money.

I am not in agreement with above mentioned example @Pankaj. Here we are talking about devaluation means we can take live example of rupee depreciation.

So for example suppose if month before we sold any goods for rupee 55 means we received one dollar against this however after depreciation of Indian rupee if we sell the same and get 1 dollar again(today 1$ =62 rupee) we are making profit of rupee 7. Answer b is right hope I am clear to all.

Devaluation of currency is reducing the value of the currency compared to the other currencies in the international market. Now if you devalue the currency of a particular country which has a robust export system then it means you are exporting healthily thereby keeping the competitive edge over other countries exporting the same goods at their currency values. I hope this helped.

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.

By devaluation we can sell our product at lower prices as comparetive to other countries but supose if the prices of exports don't remain constant and they rise then there is no profit of doing devaluation because your product is still of a high cost due to prices not remain constant.

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.

Suppose you export a good in 500 rupees a month before and suppose cost of export be constant, then if the price was 50 against a dollar and if devaluation occurs and price reduced to 40 against 1 dollar than than you export same good in 400 rupees against same amount in dollar.

Devaluation makes exports cheaper and imports costlier. It means the export value of a product decreases but it is good for economy because exports increases. So we would be even more beneficial if the export value remain constant rather than depreciating.