Causes/ objectives of currency devaluation or impact of devaluation on imports and exports.
There are some causes or objectives behind the currency devaluation. These are as follows-
1. Discouraging unnecessary impacts: if the tendency of making more profit increases among the importers then they import more goods. In this situation they may also import unnecessary goods and conscious consumption. As a result wastage of foreign currency may occur. To decrease this tendency govt. takes the help of devaluation. Because of devaluation import cost increases which decreases the profit. So importer will be discouraged to imports unnecessary goods.
2. Encouraging export: to encourage export govt. sometime devaluate the domestic currency. When govt. made devaluation of currency then the profit of exporter increases. This leads to more export.
3. Removal of balance of trade deficit: specially less developed countries face the deficit balance of trade. Gradually deficit balance of trade in that country creates deficit balance of payment. Some country takes the help of devaluation to overcome the situation. It causes increases in export and decrease import. As a result it may help to develop the balance of trade.
4. Checking unfair trade practices and black marketing of foreign currency: sometimes, the exchange rate of a country may stay above the equilibrium position. In this circumstance domestic products as well as foreign currencies can be transmitted to neighboring countries through black market. To prevent this illegal tendency govt. can take help of devaluation.
5. Adjustment of inter country foreign exchange rate.
6. Counter the foreign dumping policy: when a country sell its product at a cheaper price/rate to capture the market of another country then it is called dumping. To protect domestic industries from their harmful policy govt. may devaluate its currency. Because of devaluation the price of foreign goods will be higher in terms of domestic currency. As a result domestic industry can be protected from open competition.
7. Increase domestic employment: devaluation increases export and exports increases employment.
8. Encourages the foreign investor: purchasing power of foreign currency increases. So foreigner will be encouraged to invest in the devaluated country.
Finally we can say that from the above discussion, we can say that govt. take the help of devaluation for the betterment and compete in the world market and for economic development of his country.