B.Com Ist Year Devaluation Long Short Question Answer Notes

B.Com Ist Year Devaluation Long Short Question Answer Notes :- hii friends this post is very useful for all the student B.com, In this post you will find Business Environment Topic Wise chapter wise all the content Question Answer Notes Model Paper Examination Paper Sample Practice Paper PDF Download Hindi & English For Free

Devaluation

Q.30. What do you mean by Devaluation ? Discuss its obien tives and effects. (Meerut, 2005)

Or Explain the meaning of develuation of money. What could be the possible effects of it on a developing economy like India ?

Ans. MEANING OF DEVALUATION

When the government of any country deliberately lowered the value of its currency in terms of gold or other foreign currencies, it is called ‘Devaluation’. Devaluation makes domestic currency cheaper in foreign markets and foreign currency costlierin domestic market.

For Example, the rate of exchange between U.S. dollar and the Indian Rupee is one dollar = Rs. 40. When India devalues her currency by fixing higher rupee price for dollar then the rate of exchange would be on dollar = Rs. 42.

It implies that now India will have to spent more rupees to buy one dollar worth of goods and services and thus the value of rupee in term of dollar went down. The fall in the value of currency and devaluation implies that relatively economy of the country that has devalued foreign exchange market price of a currency has gone down, there is more demand of foreign currency by that country to meet its obligations to pay for goods and services, interest and other obligations than what it is earning in global markets by way of exports of goods and services or importing long-term and short-term funds. Some of the definitions of devaluation are as follows:

According to Paul Einzing, “Devaluation means lowering the official parties.”

According to H. E. Evitt, “Where for any reason it is considered necessary to cheapen the exchange value of country’s currency in terms of others, the process is known as devaluation.”

According to Dr. Ganguly, “Devaluation means lowering the external value of country’s currency.”

OBJECTIVES OF DEVALUATION STUDY MATERIAL NOTES

The main causes and objectives of devaluation are as follows:

  • Increase in Exports : Devaluation process makes domestic currency cheaper in foreign markets. Hence domestic goods become cheaper in foreign market which helps in increasing the exports of the country.

(2) Reduction in Imports : Devaluation makes the foreign currency costlier in domestic market. Consequently foreign goods become costlier, which discouraged the imports.

(3) For Correcting an Adverse Balance of Payment : Devaluation is used as a method of correcting an adverse balance of payment. The balance of payment can be made in favour of country by increasing exports and reducing imports. But it has been pointed of that devaluation is at best a temporary remedy. It is not a permanent cure.

(4) Protection of Domestic Industries : Sometimes government of a country also adopt the policy of devaluation to protect the interests of domestic industries. By making the foreign currency costlier and reduction in imports, demand for domestic goods can be increased. This process proves helpful in the growth of domesticindustries.

(5) Check on Dumping: When a country sells its commodities at prices lower than its costs to increase exports, then this policy is known as dumping. In such a case policy of devaluation is implemented so that dumping may not effect the domestic industries adversely..

(6) Adjustment of Exchange Rates: The price rise in India had been higher than developed world. In some years, India’s inflation rate had been 10% or more per year as against below 4% in developed countries. This disturbed rupee parity with developed countries forcing India to resort to devaluation.

(7) To Obtain Foreign Assistance : Sometimes IMF, World Dank and other developed countries pressurised developing countries to devalue their currency for providing foreign aid. When India borrowed from IMF specially after foreign exchange crisis of here was tremendous pressure on India to devalue rupee, which resorted to bring parity and get more support from IMF to increase growth.

(8) To Encourage Import of Private Capital : The fall in foreign exchange reserves from time to time and increased development needs for investment, it was felt that more foreign capital should be invested in India. This capital could become available only when we fixed realistic exchange rates. The devaluation of 1991 onwards gave fillip to flow of foreign direct investment as well as debt receipts andhelped to increase foreign exchange reserves in a big way.

(9) Protection of Export Trade : When one country adopts devaluation policy to control imports then other country also adopts this policy to protect the export trade.

(10) To End the Effects of Deflation : Deflation results in reduction of internal demand of goods. Devaluation supports export promotion and the demand of goods in foreign countries can be raised.

(11) To Check Unwanted Activities : Devaluation has helped in prohibiting smuggling. Indian goods has become cheaper for foreigners and as a result the profits of smugglers have been reduced. Devaluation will result in equilibrium between real and authorised rate of foreign exchange which can further control illegal activities of smugglers.

ADVERSE EFFECTS OF DEVALUATION NOTES

The devaluation of rupee started in 1949 after which major devaluation was in 1966 after Indo-Chinese and Indo-Pakistan wars. The next important devaluations have been from 1991 onwards to fix the value of rupee on the basis of its demand and supply, which has been continuously declining in terms of other international currencies upto end of 2002.

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