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Tuesday, 7 August 2012

Define devaluation, objects of devaluation, merits and demerits of devaluation, effects of devaluation or depreciation


It means to depreciate the value of domestic currency interms of foreign currencies. For example the rate of exchange between India U.S.A. is 35 Rs. = 1 Dollar. If India readjusts the exchange rate and offers Rs. 45 = 1 Dollar. The Indian currency will be said to have been devalued or depreciated.

Almost all the countries of the world have devalued their currencies time to time to achieve certain economic objectives. During great depression of 1930 most of the countries devalued their currencies.

Following are the main objectives of devaluation :
1. To Encourage Exports :-
Devaluation policy is adopted to increase the exports of the country. As the currency of any country is devalued, the commodities of that country becomes cheap for the other countries and they increase their demand.

2. To Discourage The Imports :-
As the currency of any country is devalued the other countries goods becomes costly to import from that country. So the people reduce their demands for foreign goods.

3. To Correct The Balance Of Payment :-
When the balance of payment of any country is unfavorable the devaluation policy is adopted. When the currency is devalued, the value of imports increases but the value of exports will be greater then the value of imports, we will say that balance of payment is favourable.

1. Correction Of Deficit :-
Devaluation makes home goods cheaper to foreign countries and foreign goods expensive to home country. In this way deficit in the balance of payment is corrected.

2. Adjustment Of Currency Value :-
When the currency is over valued, devaluation brings equilibrium in the external and internal value of the currency. So various imbalances in the economy removes.

3. Increase In Foreign Aid :-

The international lending agencies like IMF, IBRD insists upon devaluation, specially to under developed countries like India, Pakistan etc. Foreign investor also feels pleasure to do the investment in those countries where currency is devalued.

4. End Of Uncertainty :-
Devaluation removes the uncertainty in the business circles. Rate of investment alsi increases.

5. Inflow Of Remittances :-
The workers who are working abroad they would prefer to send capital in side the country. Because they will get more currency in terms of foreign currency.

1. Temporary Curve :-
History shows that devaluation is a temporary curve for the unfavorable balance of payment. Its effects are for the short period. Some under developed countries were adopted this police but its effects were only for few month.

2. Increase In Prices :-
Costly imports brings inflation inside the country. So price level inside the country also rises, due to devaluation. So it creates problem for the consumer.

3. Increase In Debt Burden :-
Devaluation increases the foreign debt burden in terms of home currency. This is big loss for the poor country like India, Pakistan.

4. Competition In Devaluation :-
There is a chance that if one country devalues other countries also follow this policy then this policy will become useless.

5. Terms Of Trade Problem :-
On one hand country has to pay greater amount of money for imports, on the other hand she gets less money for her exports. So devaluation causes deterioration in terms of trade.


Chakar Baloch 29 November 2016 at 13:01  

Very easy for me to understand ...thanks bro

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