Question

2. Discuss the effectiveness of currency devaluation to address balance of payments problems in developing countries.

Answer 1

Currency devaluation - It is a method adopted by the government in which government itself decreases the value of currency. Government of less developed countries adopted devaluation to bring improvement in the balance of payment. Devaluation makes import costlier and export cheaper and in this way helps in increasing the exports and reduces the imports of nation and improves the balance of payment.

It can be explain with the help of an example.

Before devaluation 70RS was equal to 1 US dollar. But due to devaluation, 80 RS was equal to 1 US dollar. Now, if nation import from other nations, India will have to pay more currency and it will be beneficial to reduce import. At the same time, for exports now government will earn more money and promotes exports. In this way, balance of payment will improve.