User:Naveen.kumar.sse/sandbox

MEANING OF DEVALUATION:- devaluation means reduction by the government in the value of its national currency in term of gold as other foreign currencies. In other words, devaluation implies an international reduction in the internal value of the national currency.as a result of devaluation the purchasing power of the currency in term of gold or in term of others foreign currencies declines. devaluation of currencies gives stimulus to the country's imports. the reason being, the exports of the country devaluing the currency, become cheaper in the markets of those countries which do not devalue their national currencies devaluation has also the effect of reducing the import of the country which resorts to it. the reason that foreign goods become costlier in the country which devalues its currency. in shorts, devaluation encourages exports and discourages imports consequently it help the country in in eliminating and reducing the deficit in its balance of payments.

why do the exports of a country resorting to devaluation register an increase? this can be explained with the help of an example. let us suppose that India reduces its rate of exchange the American dollar from re1= 10 cents. this reduction in the value of rupee wile make Indian exports to America cheaper than before. the reason than an American importer by spending 10 cents will be able to buy from India the same quantity of goods which could buy earlier with 13 cents.As against this the the American goods in the Indian market will become costlier than before consequent upon the reduction of the internal value of Indian rupee.The reason being that the Indian importer by spending one rupee could purchase from America worth 10 cents by spending the same one rupee. As such India's imports from America become more expensive than before. thus the devaluation of currency can help the country to eliminates to reduce the deficit in its balance of payments.

It is true that exports of the country register an increase as a result of devaluation but the actual extent in the increase in export depends upon the elasticity of the foreigner demand for the goods in the country in the question. In other word, the intent of the foreigners for the country's export is elastic or inelastic. If the foreigner s demand inelastic then the export of the country will not register any worth wile increase as a result of devaluation. on the country, if the forgiveness demand for the export of the country is elastic then they will register a substantial increase as a convergence of devaluation.

THERE ARE TWO TYPES OF EFECT OF DEVALUATION (1)	NEGATIVE EFFECT (2)	POSITIVE EFFECT If, as result of devaluation, the export of country increases in proportion less than the reduction in the internal value of the currency then the effect of devaluation will be negative. For e.g.:-  if as a result of 10% of devaluation, the export goes up early by 5% then the effect of devaluation will be negative. As against this, if a result of devaluation will be negative. As against this, if as a result of devaluation, the export increases in a proportion greater than the reduction on the internal value of the currency, then the effect of devaluation will be positive. For example, if as result of 10% devaluation the export goes up by 15% then the effect of devaluation will be definitely positive.

OBJECTIVES OF DEVALUATION
(1)	To eliminate or to reduce the deficit in to balance of payment:- If there is a chronic deficit in the balance of payment of a country, then there is no ulternative for that country except to devalue its currency, it will increase its export and reduce its import thereby eliminating or reducing the deficit in its balance of payment. (2)	To check Dumping:- If a country sells its product in another country at price less than its cost of production, it is known as dumping. The objective of dumping is to crush the industries of the other countries by selling goods at prices below the cost of production. Hence it becomes very essential

For a country to check dumping of goods by foreigners into its domestic market. Now this dumping can be effectively checked by devaluing by national currency by making import expensive, devaluation will automatically put an end to dumping in the country. LIMITATION OF DEVALUATION:- Devaluation is a weapon which cannot be successful in achieving its objectives because it suffers from a number of limitations.

These limitations are as follows
(1)	 The devaluation of currency by a country can be successful in achieving its objective only if other countries also devalue their currencies, then the country concerned will not be able to derive any advantage out of it. With other currencies also devalued, the country in question will not be able to gain any special advantage from devaluation of its currency. (2)	 The devaluation of currency can be successful only if the prices of export goods do not raise above the pre devaluation prices. For example, if the exporters of the country increase the price of their goods after devaluation,there shall not be anyworthwhile increase in the export of the country. The very object of devaluation then stand defeated. (3)	Frequent devaluation of currency give a rude shock to other people’s confidence in the in the currency of the country in question the other countries will keep on postponing there purchase from the country concerned in the hope tha there will be still further devaluation of the currency. Thus frequent devaluation has adverse effect on the export of a country. Devaluation proves only a temporary expedient in reducing the defect in the balance of payment after some time.

(4)INCREASE IN FOREIGN EXCHANGE EARNINGS:- It was also argued that there would be increase in the country’s foreign exchange reserves as a result of devaluation. This would certainly bring about an improvement in the adverse balance of payment of the country. (5)INCREASE IN THE FLOW OF THE FOREIGN CAPITA:- Another advantage of devaluation, it was argued, would be that it would encourage remittances from India to other countries. In other words, the devaluation of the rupee would stimulate the foreign capital in to the country. It would tempt the foreigners to invest more capital in to the country.