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FOREIGN TRADE — Economics STD 12 Commerce — Question

Gujarat BoardEnglish MediumSTD 12 CommerceEconomicsFOREIGN TRADE3 Marks
Question
Explain with examples the difference between following four terms: $(1)$ Fall in market value of rupee. $(2)$ Devaluation of rupee.
$(3)$ Rise in market value of rupee. $(4)$ Over valuation of rupee.
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Answer

$(1)$ Decrease in market value of rupee $($Fall in market value of rupee$):$
  • Suppose there is less supply of foreign currency, dollar in the market than its demand, owing to shortage currency exchange rate between dollar and rupee rises.
  • It is called fall in the market value of rupee. E.g. $l\$=Rs.60$ is the exchange rate in the market.
  • Due to any reason import payment is higher than export income and demand of dollar in the market rises and there is shortage of dollar and rises exchange rate to $1\$=Rs.65$ it is said that market value of rupee has fallen $($decreased$).$
  • Earlier $\$1$ was obtained against $Rs.60$ now to get $\$1\ Rs.65$ are paid.
  • Market value of rupee has fallen $($decreased$).$
$(2)$ Devaluation of rupee:
  • When the government of any country declares fall of its currency in context to other currency is called devaluation.
  • This is done by authorized government of the country. e.g. instead of $l\$=60\ Rs.$ government authorized exchange rate is $l\$=65\ Rs.$ Compared to dollar the value of rupee is falling.
  • So it is called devaluation of rupee.
$(3)$ Rise $($increase$)$ in market value of rupee:
  • Suppose in the market the supply of dollar is higher than its demand, and dollar is in abundance, the exchange rate will go down.
  • The market value of rupee has increased. e.g. exchange rate $\$=60Rs.$ prevails in the market, owing to some reasons demand of dollar declines $($decreases$)$ export income is higher than import payment means dollar is in abundance, then exchange rate decrease to $1\$=55\ Rs,$ if this happens it is called market value of rupee has increased.
  • Earlier $\$1$ was obtained against $65\ Rs$ now $\$1$ is obtained against $55\ Rs.$
$(4)$ Over valuation of Rupee:
  • When the government of a country declares increase in the value of its currency in context of other currencies is called over valuation.
  • This is done by authorized government e.g. when exchange rate is $l\$=60Rs.$ but government is authorized and declares $1\$=55\ Rs.$
  • It is called over valuation of rupee.
  • In short it is over value when government declares the payment of $133$ in rupee cheaper and owing to the market factors less rupees are paid against $1\$.$
  • This market condition shows increase in market value of rupee.

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