Balance Of Payments

Chapter Outline:
Balance of payment

Balance of Trade,
Equilibrium in BOP Devaluation and Depreciation; Current and Capital account convertibility Recent development in foreign capital flows

12/25/2012

Page 2

Introduction
Balance of payments is a statistical statement that summarizes transactions between residents non residents during a period.

Balance of payments are systematic records of all economic transactions between one country and rest of the world.
Balance of payments is a statement of systematic record of all economic transactions between one country and rest of the world. It adopts a double entry book-keeping system with two sides. Debit and credit. Payments are recorded on the debit side and receipts on the credit side.** Broadly, it contains three sets of accounts: 1) Current account 2) Capital account 3) Financial account**

12/25/2012

Page 3

12/25/2012

Page 4

Balance of Payments components

Current A/c: It is a goods & services account.
Current A/c = (Balance of trade + Net factor income from abroad + Net unilateral transfers from abroad)

Financial A/c: It involves transactions that involve financial assets and liabilities.
Financial A/c = (Increase in foreign ownership of domestic assets - Increase in foreign ownership of domestic assets) = (FDI + Portfolio investment + Other investment). Foreign exchange reserves: This is official international reserve held by government established central bank. These include official gold reserves, foreign currencies, IMF special drawing right (SDR) & other foreign assets.

Capital A/c: Capital accounts are investments over longer period of time. It involves exchange of migrants assets, foreign aid capital & intellectual property. Net errors & omissions: Errors are common to occur due to complexity of the calculations and difficulty in obtaining results. Omissions are rarely used by governments to conceal transactions. BOP Identity
( X M ) = Ko Ki

12/25/2012

Page 5

Balance of Payments components

The balance of payments identity states that: Current Account = Capital Account + Financial Account + Net Errors and Omissions This is a convention of double entry accounting, where all debit entries must be booked along with corresponding credit entries such that the net of the Current Account will have a corresponding net of the Capital and Financial Accounts: X+Ki = M+Ko where: X = exports M = imports Ki = capital inflows Ko = capital outflows

Rearranging, we have:
X-M = Ko-Ki yielding the BOP identity.

The basic principle behind the identity is that a country can only consume more than it can produce (a current account deficit) if it is supplied capital from abroad (a capital account surplus).
12/25/2012 Page 6

Current Account
Current accounts mainly consists of two groups
Merchandise or trade account. Invisible account.

In trade or merchandise account, all PHYSICAL goods exported and imported are recorded. Invisible account consists of services account and the gifts & charities account.
Services account entries could be banking and insurance charges, interest on loans, tourist expenditure, transport charges etc. Gifts & Charities accounts consist of all those items which are received or given away free by residents of the nation. It may be physical goods or cash.

12/25/2012

Page 7

Current account Invisible account

IMF includes following items in the invisible account: International transportation of goods including warehousing, in transit and other transit expenses. Travel for reasons of business, education, health, international conventions or pleasure. Insurance premiums and payments of claims.

Investment income, including interest, rents, dividends and profits.

Miscellaneous service items such as advertising, commissions, film rental, pensions, patent fees, royalties, subscriptions to periodicals and membership fees. Donations, migrant remittances and legacies. Repayment of commercial credits. Contractual amortization and depreciation of direct investment.

12/25/2012

Page 8

Capital Account
Capital account deals with payments of debts and claims. It consists of those components of Imports & exports such as Private balances, Assistance by international institution agencies, Specie flow & Balances held on government account. Summary of BOP is

Current account and capital account should necessarily balance each other.
If Indias imports of goods are more than its exports, then it will have a deficit in its current balance of payments. India will have to pay either in gold and other assets or by borrowing from other countries.

12/25/2012

Page 9

Distinction between Balance of trade & Balance of Payments

Balance of trade refers to the trade of Visible items only. Balance of payments include all international economic transactions of visible and non visible items. Import and export of GOODS is a visible item. Whereas services, banking, insurance, capital flows, buying and selling of gold etc. are non visible items.

Balance of trade is partial study of Balance of payments. It simply refers to the difference of value of exports and visible import.
Thus, balance of trade is nothing but a major components of the balance of payments. In short, balance of trade is a partial picture, while balance of payments is a complete picture of countrys international economic relations.

12/25/2012

Page 10

Balance of Payments always balances

If all entries are made correctly, total debits must equal total credits.
ASSETS (CREDITS)
1. 2. EXPORTS OF TRADE EXPORT OF SERVICES(BANKING, SHIPPING,INSURANCE,TOUR ISM,ETC.) 3. TRANSFER OF PAYMENTS FROM REST FROM REST OF THE WORLD (GIFTS,AID,ETC.) 4. CAPITAL RECEIPTS (LOANS,SALE OF ASSETS TO FORIEGNERS, RECIEPT OF CAPITAL)

RS. CR.
550 150

LIABILITES (DEBITS)
1. 2. IMPORTS OF TRADE IMPORTS OF SERVICES.(BANKING,IN SURANCE,TOURISM,ET C.) 3. TRANSFER PAYMENTS TO REST OF THE WORLD (GIFTS,AID,ETC.) 4. CAPITAL PAYMENTS(LOANS TO FORIEGNERS, BUYING OF ASSETS FROM FORIEGNERS,PAYMENT S OF CAPITAL TO FORIEGNERS) TOTAL PAYMENTS

RS. CR. 800 50

100

80

200

70

TOTAL RECIEPTS

1000

1000

12/25/2012

Page 11

BALANCE OF PAYMENTS: SURPLUS AND DEFICIT

When the central bank buys domestic currency and sells the foreign reserve currency in the private FOREX the transaction indicates a balance of payments deficit. Alternatively, when the central bank sells domestic currency and buys foreign currency in the FOREX the transaction indicates a balance of payments surplus.

12/25/2012

Page 12

Disequilibrium in the Balance of Payments

B=RP Where, B stands for balance of payments, R denotes receipts from foreigners, P stands for payments made to foreigners A country whose balance of payments is positive is called as surplus country. A country whose balance of payments is negative is called as deficit country. Types of disequilibrium

Cyclical disequilibrium.
Structural disequilibrium. Short run disequilibrium. Long run or secular disequilibrium

12/25/2012

Page 13

Types of Disequilibrium
Cyclical disequilibrium: It occurs on account of trade cycles. Cyclical fluctuations in demand are caused by changes in Income, employment, output & price.
Trade cycles follow different paths and patterns in different countries. There are no identical timings and periodicity of occurrence of cycles in different countries. No identical stabilization programmes and measures are adopted by different countries. Income driven demand for imports in different countries are not identical. Price driven demand for imports differ in different countries.

Structural disequilibrium: It is caused because of fluctuation in the demand based on changes in tastes, fashions, habits, income, economic progress etc.
Structural changes are also produced by variations in the rate of international capital movements. Other causes are due to crop failure in prime commodities, shortage of raw materials, labor strikes etc. leads to reduction in Export.

12/25/2012

Page 14

Types of disequilibrium
Short run disequilibrium: When a country borrows or lends internationally, it will have short run disequilibrium, as these are usually for short period.
Short run disequilibrium may also emerge if a countrys exceeds its exports in a given year. It is a temporary one, because later on country will be in a position to correct it easily by importing more. Still this disequilibrium can not be justified as it may lead to Long term disequilibrium. A persistent deficit will tend to reduce its foreign exchange reserves and country may not be able to raise any more loans from foreigners.

Long run disequilibrium: It occurs because of accumulation of deficits or surpluses over a long period.
IMF uses the term fundamental disequilibrium to describe a persistent, long run disequilibrium. It is mainly due to deficits which exist continuously for a long period of time in a countrys balance of payments. Unchecked series of short run disequilibria lead to the fundamental disequilibrium in long run. It is caused by persistent deep rooted dynamic changes which slowly takes place in the economy.

12/25/2012

Page 15

Causes of disequilibrium
Trade cycle: Cyclical fluctuations, their phases and amplitudes, differences in different countries, generally produce cyclical disequilibrium. Huge development & investment programmes:
Due to huge development and investment programs , Import goes on increasing for want of capital for rapid industrialization, while exports may not be boosted up to that extent as these are the primary producing countries. Thus, there will be structural changes in the balance of payments and structural equilibrium will result.

Changing Export demand:

A vast increase in the domestic production of foodstuffs, raw materials, substitute goods, etc. in advanced countries has decreased their need for import from the underdeveloped countries. Hence, export demand has considerably changed resulting in structural disequilibrium. Similarly, developed countries will loose their market share in underdeveloped countries, owing to the tendency of underdeveloped nations to self relaince.

12/25/2012

Page 16

Causes of disequilibrium
Population growth: High population growth in poor countries ahs adverse impact on their balance of payments. Increase in the population increases the needs of these countries for imports and decreases the capacity of export. Huge external borrowing: A country will have adverse balance of payments when it borrows heavily from another country, while the lending country will have a favorable balance and a deficit balance of payments. Inflation: Rapid economic development, increase in the income & price will adversely affect BOP position of a developing country.
With increase in income, import requirements will get increased. Also consumption of the domestic production will be fast. This leads to increase in Import and decrease in export. Also huge investment in heavy industries in the developing countries may have an inflationary impact, as the output of these industries will not be forthcoming immediately, whereas money income will have been already increased.

12/25/2012

Page 17

Causes of disequilibrium
Demonstration effect: When people of underdeveloped nations come into contact with those of advance countries through economic, political or social relations there will be a demonstration effect on the consumption pattern. It will increase need for import whereas their export quantum remains same. Reciprocal demands: Need of reciprocal demand for products of different countries differs leading terms of trade of a country may be set differently with differently with different countries under multi trade transactions. Which may lead to disequilibrium.

12/25/2012

Page 18

Methods of correcting BOP disequilibrium

The various measures used for correcting an adverse balance of payments are of two kinds:

Monetary measures
Non monetary measures

Monetary measures.
Deflation Exchange depreciation. Devaluation. Exchange control.

Non-Monetary measures
Tariff import duties. Import quotas Export promotion policies and programmes.

12/25/2012

Page 19

Correcting BOP disequilibrium (Monetary)

Deflation.
Generally, deficit in the BOP occurs due to high imports and low exports.

In this situation, country may adopt deflationary or dear money policy by raising interest rates and restricting credit.
Thus, prices of domestic goods fall which makes exports attractive and imports relatively costlier. Deflation keeps exchange rates unaffected and tries to correct the deficit in the BOP through domestic changes. In short, deflation being inexpedient, its side effects are dangerous to a poor country. It creates more unemployment and poverty.

Exchange Depreciation.
This is a correcting method in which external value of the home currency is depreciated. Exchange depreciation of a country will tend to cheapen its domestic goods for the foreigners so that its exports will be boosted, while its imports will be costlier. The success of this method hugely depends on the cooperation of the foreigners. If all countries start depreciating their exchange rates then the technique may not prove useful. This method is not feasible under the present system of IMF of fixed exchange rate system.

12/25/2012

Page 20

Correcting BOP disequilibrium (Monetary)

Devaluation.
Devaluation is Official decrease in the external value of a currency or good. Exchange depreciation is based on the market mechanism whereas devaluation is arbitrary. Devaluation is undertaken when the currency is found to be unduly overvalued. If a country has persistent deficit in its BOP, it may devalue its currency with the permission of IMF. Once a countrys currency is devalued its exports become cheaper to foreigners and imports become relatively dearer.

Conditions for successful working of devaluation.

A fairly elastic demand. Structure of exports and imports. Domestic price stability. International cooperation. Coordination of other measures.

12/25/2012

Page 21

Correcting BOP disequilibrium (Monetary)

Exchange control.
Restrictions on the use of foreign exchange by central banks are called exchange controls. During exchange control, all the exporters have to surrender their foreign exchange earnings to the central bank. Under exchange control, the central bank releases foreign exchanges only for essential imports and conserves the rest of the balance. An exchange control offers no permanent solution to the problem of persistent disequilibrium.

12/25/2012

Page 22

INDIAS BALANCE OF PAYMENT

12/25/2012

Page 23

TRENDS IN INDIAS BALANCE OF PAYMENTS

India had faced pressures on BOP from time to time either due to certain domestic compulsions or due to external factors. The whole period, covering nearly five decades, can be divided into five sub-periods, depending on: (i) the nature of the BOP problem, (ii) the overall macroeconomic environment, and (iii) the external aid situation. Period I (Up to 1975-76): A Period of Deterioration The entire period was very difficult for Indias BOP, partly because of slow growth of exports in relation to import requirements and partly because of adverse external factors. Despite tight import controls (through quantitative restrictions) and foreign exchange regulations, the CAD was 1.8 per cent of the GDP. Foreign exchange reserves were at a low level, generally less than necessary to cover three months imports. Almost the entire CAD (92 per cent) was financed by inflows of external assistance on highly concessional terms. There was hardly any commercial deficit.

12/25/2012

Page 24

TRENDS IN INDIAS BALANCE OF PAYMENTS

Period II (1976-77 to 1979-80): A Period of Transition and Improvement These few years stand out as the golden years for Indias BOP. India had a small current account surplus (0.6 per cent of the GDP on an average) and foreign exchange reserves equivalent to about seven months imports. Export growth was good but the primary reason for the sharp improvement in BOP was the dramatic improvement in net invisibles. Net invisibles increased from Rs. 193 crores in 1974-75 to Rs. 2,486 crores in 1979-80. Period III (1980-81 to 1989-90): Emergence and Persistence of Structural Imbalances The period broadly corresponds to the period of the Sixth Plan and the Seventh Plan. The Sixth Plan was launched when the economy was faced with severe BOP difficulties. In 1981, India entered into an arrangement with the IMF for a loan of SDR billion under the Extended Fund Facility. The amount was to be disbursed over a three-year period. India, however, drew only SDR 3.9 billion and the arrangement was terminated in early 1984 at Indias request because of the improvement in the BOP position in 1983-84.
12/25/2012 Page 25

TRENDS IN INDIAS BALANCE OF PAYMENTS

The deficit on external trade and payments suddenly jumped from the first year of the Seventh Plan and was particularly acute during the last two years of the plan. The CAD more than trebled over the Plan period as a whole, the deficit was as high as 2.2 per cent of the GDP, as compared to 1.3 per cent during the Sixth Plan. Period IV (1990-91 to 1995-96): Stabilisation and Strengthening The BOP crisis reached its climax during 1990-91CAD reached the maximum of 3.3 per cent of the GDP during this year. A comprehensive strategy to deal with the BOP situation was put in practice. The principal elements of the BOP strategy can be summarised as follows: Preference to Non-debt Creating Capital Flows: The most important element of strategy has been the paradigm shift in the attitude towards inflow of capital from abroad. Capital inflow from abroad was treated more generally as a device to finance CAD. Now non-debt creating capital inflows, specially FDI, are being encouraged on account of their positive impact both in terms of technology and the stabilising role in external sustainability. The policy has, therefore, been to gradually liberalise capital account.
12/25/2012 Page 26

TRENDS IN INDIAS BALANCE OF PAYMENTS

Recognising that liberalisation of capital account needs to be treated as a continuous process, the approach is based on a careful and continuous monitoring of certain preconditions/signposts such as monetary and fiscal discipline, exchange rates, structural reforms, etc. Stabilisation and strengthening strict fiscal and monetary discipline to control aggregate demand. Monetary policy aimed at slowing down the growth of money supply.

Exchange Rate Policy: LERMS,(Liberalised Exchange Rate Management System) a dual exchange rate system, was introduced in the Budget for 1992-93. Under this system, 40 per cent of foreign exchange earnings were to be surrendered at the official exchange rate. Remaining 60 per cent were converted at a market-determined rate.
Budget for 1993-94 introduced UERS which makes rupee convertible at unified market determined rate of exchange. All payments and receipts of foreign exchange to be converted in rupees at market determined rate of exchange.

12/25/2012

Page 27

TRENDS IN INDIAS BALANCE OF PAYMENTS

Budget for 1994-95 introduced full convertibility on current account that makes many trade transactions relatively more free of controls. Import restrictions on capital goods, raw materials and components virtually eliminated. Thus, excess import demand will be reflected in a higher market exchange rate and self-correcting mechanism will operate to keep trade deficit in check. Period V (1996 to 2005): Resilience in Addition to Strength

The BOP has been in overall surplus since 1996-97 with forex reserves rising, on an average, by $8.50 billion per annum during 1996-97 to 2004-05.
The current account also turned into surplus during 2001-02 after a gap of 24 years (current account surplus was last recorded in 1977-78). During 2002-04, BOP on current account remained in surplus. CAS could be attributed to the following factors: Buoyancy in private transfers. Fast expansion in software exports.

12/25/2012

Page 28

TRENDS IN INDIAS BALANCE OF PAYMENTS

CAS, accompanied by accelerated net capital inflows resulted in a huge increase in forex reserves. This also facilitated the Governments decision in early-2003 to effect repayment of foreign loan of $1.54 billion due to IBRD and another loan of $1.25 billion to the ADB. However, current account surplus may be temporary feature for the economy. A sustainable current account surplus must be based on reasonable export and import growth, consistent with the rising development needs and export competitiveness of Indian products abroad.

The role of capital account has also undergone a change. Till recent time, the role of capital account was limited to financing the current account deficit, thus, effectively acting as a mirror image of the current account. However, with the changing composition and dimensions of capital flows, the focus is rapidly shifting towards individual constituents in the capital account. For instance, in recent years, the capital account has been dominated by flows in the form of foreign direct investments and portfolio investments.

12/25/2012

Page 29

Balance of payments
Balance of payment is the difference between a countrys receipts and payments with regards to her exports and imports. Balance of trade, which is a sub-set of balance of payment, is measured in terms of the differences between visible and invisible exports and imports. The balance of payments financial statements is made of two parts: current account and capital account. In the event of disequilibrium in the balance of payment, deflation, depreciation, devaluation, exchange control, capital movement, encourage of exports and discouragement of imports are some of the available methods for correcting the imbalances in the trade.

12/25/2012

Page 30

Devaluation and Depreciation

Devaluation refers to a reduction in the external value of a currency in terms of other countrys currency. Under it, there is no change in the internal purchasing power of the country. A country with fundamental disequilibrium in its BOP may devalue its currency in order to

INCREASE its EXPORTS &

DISCOURAGE IMPORTS For example: With devaluation, the domestic price of imports in the devaluing country increase and the foreign price of its exports falls.

This can be explain with the help of the following example:

Before the devaluation exchange rate in India was 50INR=$1, it means 1INR = 0.020 $ after the devaluation the exchange rate is 55INR=$1, means 1 INR=0.018$. As a result US imports became expensive for India and exports became cheaper in US because the US traders could buy goods worth 1INR from India by paying $0.18 instead of 0.020$. And for imports it have opposite effects .
12/25/2012 Page 31

Devaluation and Depreciation

If an economy is operating under a fixed exchange rate and if it officially lowers the price of its currency in foreign market. It is known as devaluation. Thus, devaluation is the official decrease in domestic value of the currency in relation to foreign currency Depreciation Depreciation means reduction in value of domestic currency in relation to foreign currency due to market demand and market supply If demand for foreign currency is remaining constant and if supply of foreign currency increase, so it will depreciate the value of foreign currency

12/25/2012

Page 32

Effects of Devaluation
1. Effects of Devaluation In BOP: We have already told that because of devaluation the exports will increase and imports will decrease. The exportable commodities of a country become cheaper abroad and on other hand the prices of imported commodities become goes up. Economists have explained a number of situations a) Inelastic demand for Exports

Incase of inelastic demand for export

Devaluation instead of increasing export earning decrease the export earnings of devaluating country. So total value of export after devaluation decreases Dx

R
R1

Sx Sx

Export

12/25/2012

Page 33

Effects of Devaluation
b) less elastic demand for Exports

incase of less elastic demand for exports the result will be same as in case of above
Total exports earning before devaluation are greater than after devaluation . after devaluation exchange rate tends to decrease from R to R1 and export earnings after devaluation decrease

R
R R1 Dx xx X Sx Sx1

12/25/2012

Page 34

Effects of Devaluation
c) Elastic demand for exports

If foreign demand for exports is elastic or greater than unity, devaluation will improve the BOP
before devaluation R is exchange rate and X is export, after devaluation exchange rate tends to decrease, the new exchange rate is R1, which cause to increase the export from X to X1 so export earnings after devaluation increase

R R1

Sx Sx Dx x x1

12/25/2012

Page 35

Effects of Devaluation
D) Unity elastic demand for exports

If foreign demand for exports is unity elastic, devaluation is ineffective before devaluation R is exchange rate and X is export, after devaluation exchange rate tends to decrease, the new exchange rate is R1, which is ineffective in improving the BOP because Reduction in exchange rate is equal to increase to export

R
R1

Sx Sx Dx

x1

12/25/2012

Page 36

Effects of Devaluation
2. Effects of devaluation on imports

In the effect of devaluation on imports we should consider different import elasticities,

a) inelastic demand for import Devaluation increases the import prices, which decrease the demand for imported goods but when demand for imported goods became inelastic it can not decrease There will be loss instead of gain. because if we look at the fig total value of import increase form OREM to OR1E1M its imports even when they have become costlier DM

R1 R

E1 E

S1 m Sm

import

M
12/25/2012 Page 37

Effects of Devaluation
b) Less elastic demand for imported goods

when demand for imported goods are relatively inelastic devaluation in that case is ineffective ,because due to devaluation increases in exchange is greater than decrease in import
Look at the picture due to devaluation exchange rate increases from R to R1 but there is a small reduction in import i.e. import decreases from m to m1

R R1 R Dm m1 m M Sm Sm1

12/25/2012

Page 38

Effects of Devaluation
C) More elastic demand for imports incase of more elastic demand for imports Devaluation of currency is effective Because reduction in import is Greater than increase in exchange rate And this thing is visible from the fig

R1 R

Dm
m1 m

12/25/2012

Page 39

Effects of Devaluation
D) Unity elastic demand for imports

If elasticity of demand for imported goods is equal to unity the total value of imports before and after devaluation remains the same and there is no effect of devaluation on BOP
because total value of imports before and after devaluation of Import are equal

R1 R m m1

12/25/2012

Page 40

Effects of Devaluation
3. Terms of Trade( TOT) Effect of Devaluation: TOT means the ratio of exports prices and imports prices. The effect of devaluation on terms of trade depends on demand and supply elasticities for exports and imports. The following relationships explain the effects of devaluation on ToT. a) If demand elasticisties for imports and exports > supply elasticities for imports and exports devaluation improve the ToT. b) If demand elasticisties for imports and exports < supply elasticities for imports and exports devaluation worsens the ToT. c) If demand elasticisties for imports and exports = supply elasticities for imports and exports devaluation no effect on the ToT.

12/25/2012

Page 41

Effects of Devaluation
3. Income effects Devaluation: It is difficult to measure the exact effect of devaluation on the national income, but normally it has been seen that it leads to rise the real volume of exports and decline the real volume of imports, as a result the national income of devaluating country will increase The additional income so generated will further increase income. This will leads to an increase in domestic consumption and saving

12/25/2012

Page 42

Effects of Devaluation
Exchange rate, E

Effects of a Currency Devaluation

DD 2 E1 1

E0

AA2

AA
1

Y1

Y2

Output, Y

12/25/2012

Page 43

Effects of Devaluation Explanation to the graph

Due to devaluation exchange rate rises from E0 to E1 . Due to devaluation exports increases so supply of money increases , money supply curve shift to the right the AA curve to the right. So, devaluation raises GDP and reduces unemployment 4) Effect of devaluation on supply in case of devaluation the exports increase and imports decrease , but exports increase if supply of resources and raw material could be increase easily, it may be true in case of depression when a country is possessing unused resources. But if a country is already having full employment the supply will not increase

this is the reason that so many developing countries do not have Export Surplus
in such circumstances the devaluation will hardly lead to increase the exports

12/25/2012

Page 44

Effects of Devaluation
5) Effect of devaluation on debt burden Owing to devaluation, debt burden of a country will increase because of devaluation, the expenditures pertaining with the imports of military hardware's, invisible items, education, embassies, health care and shipping will increase

12/25/2012

Page 45

Conditions for the success of Devaluation

Devaluation is an important measure to remove the disequilibrium in the balance of payment. But it success depends on some essential conditions. They are as follows, 1.More than unity Elasticity of Demand for exports :

It is essential for the success of devaluation that the elasticity of demand for exports should be grater than unity, if elasticity of demand for exports is less than unity the effect of devaluation on BOP is not favorable
2. Sufficient supply of Exports:

The second condition is that the supply of exports should be adequate to meet the increase demand for exports after devaluation.
3. Stable Internal Price Level: The effects of devaluation will be positive if the price level remain constant in the country after devaluation. When there is devaluation, exports increase and imports dearer, as a result shortage of consumer goods appear in the country which rises the prices.

12/25/2012

Page 46

Conditions for the success of Devaluation

4. Non Competitive Devaluation: Devaluation will be successful if other countries do not devalue their currencies. If the other countries devalue their currencies the effect of devaluation for the first devalue country will be neutralized. 5. Counter devaluation measure: When a country devalue it currency and other countries adopt measure to counter the effects of devaluation on them, devaluation will not help the devalue country. Because if other countries raises tariffs duties on imports from the devaluing country the export of devaluing country will become dearer and the beneficial effect of devaluation will be offset In other hand the non devalue countries give exports subsidies to their industries, their exports to devaluing country will become cheaper and the later will not be able to reduce its imports.

12/25/2012

Page 47

Conditions for the success of Devaluation

6. Spirit of sacrifice by people: For successful devaluation spirit of sacrifice in devaluating country is important ,workers should avoid disputes and strikes in order to increase the productivity people should limit their expenditure on imported goods, restricts unnecessary foreign trips, measures should be taken to encourage exports and discourage imports

12/25/2012

Page 48