Economics/exchange rate

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Question
Sir,
I have an odd question.
Countries often devalue their currencies against US dollar. Can the reverse be done? An example.
Can India overvalue/appreciate its rupee against dollar from one US dollar = 62 Indian rupees to one dollar =57 Indian rupees?
Hope your kind response. Jose, India.
Ps. Due to net error I couldn’t thank you for your earlier reply on
“USA buy LNG gas at US dollar 3 per thousand cubic feet from Qatar. While India pay US dollar 10 for the same quantity to Qatar.”
Sorry.

Answer
Hi Jose,
This is of course NOT an odd question. This is a genuine economics question. The only difference is this is very, very rare in today's world. But it is not impossible.

This very phenomenon you have mentioned is called "appreciation of money" or, officially, "revaluation" of currency.

Yes, a country can do that. But then here are some implications.

First, when a currency is officially changed into value in terms of international currency, such as Rs 62=$1 to Rs 57=$1, this could mean Indian currency has gained value internationally for trade and commerce. However, domestically, it may have little impact.

Second, as rupee value is raised, there will be a big impact on international trade of India. Foreigners have to pay for goods imported from India in Indian currency. That means they have to buy Indian currency in foreign exchange markets. They have to pay higher amount in terms of their currency than previously what they used to pay (before Indian currency was appreciated). To the foreign countries, this in real terms means prices of Indian goods (measured in their currencies) has gone up. The simple theory of demand tells us that the demand for Indian goods in foreign market must fall. As a result, Indian exports will fall. How much India will lose or gain now depends upon relative elasticities of demand. Elasticity is likely to be high, since demand has gone down. Chances are there are losses though exports.

Third, Indians have to pay for imported good in foreign currency. Indians will have to buy foreign currency in the foreign exchange market. Now that they have to pay LESS of Indian currency than they used to pay for the same amount of foreign currency, to the Indians the price of a foreign product has in real terms fallen. That means imported goods are now cheaper to the Indians with the unchanged amount of rupees in their wallet. The law of demand states that, as price of a product falls, other things remaining the same, the demand for the product will go up [unless otherwise it is a zero-elastic product like medicine]. So Indian imports go up.You can buy a Toyota relatively more cheaply than an Ambassador!

From the "Second" and "Third" reasons above, we conclude that, as Indian currency value is on the upgrade, exports go down and imports go up. This may be expressed as under:

NX = CHANGE IN EXPORTS - CHANGE IN IMPORTS < 0

That is, net exports or NX falls. The balance of payments has undergone a change.

Now the question crops up, if appreciation of currency in a country causes net exports to fall, will a country ever resort to such strategy? Sometimes a country may have to take such measures to deal with balance-of-payments problems. For example, the Indian government may decide to restrict exports (of certain goods which may form the bulk in trade) and foster imports (there was a time no Indian could drive a foreign car or use foreign products, and now foreign cars are plying in the Orley Drive in Mumbai like hell). There may be some good policy reasons for that. This is more a technical field of international economics. Advanced math, including calculus, may be used to treat of such theories.

I hope, Jose, this gives the answer you wanted.
Best.  

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Eklimur Raza

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It appears some students in this website are confused about elasticity of demand and the slope of the demand curve when they are trying to figure out why rectangular hyperbola comes up in case of unitary demand curve. First, they don't know that RH can be depicted in a positive quadrant of price,quantity plane. Secondly, they make the mistake that the slope of RH is constant at -1. Two points could help them: first, e=1 at each and every point of the RH, because the tangent at any point shows lower segment=upper segment (another geometric definition of e); yet slopes at different points,dQ/dP, are different; second, e is not slope but [(Slope)(P/Q)]in absolute terms. Caveat: only if we measure (log P) along the horizontal axis and (log Q) up the vertical axis, can we then say slope equals elasticity --in which case RH on P,Q plane is transformed into a straight-line demand curve [with slope= -tan 45 deg] on (log Q),(logP) plane, and e= -d(log Q)/d(log P). [By the way, logs are not used in college textbooks --although that is helpful in econometric estimation of elasticity viewed as an exponent of P, when demand equation is transformed into log-linear form.] I have not found the geometrical explanation I have given in any textbook followed in undergraduate and college classes in Canada (including the book followed in a university where I taught for a short time and in the book followed in George Brown College, Toronto, where I teach.

Experience

About 11 years' teaching economics and business studies, and also English, history and elementary French.Practical experience in a development bank, working with international donor agencies like the World Bank and the ADB. Experience in free-lance journalism, including Canada's "National Post."

Organizations
I teach micro- and macroeconomics at George Brown College (continuing education), Toronto, ON, Canada.

Publications
Many articles and editorials, on different subjects, in English newspapers. Recently an applied Major Research Paper, based on a synthesis of the Solow growth model and the Lewis two-sector model, has be accepted by Ryerson University, Toronto. Professors Thomas Barbiero and Eric Cam, Ryerson University, accepted the paper.

Education/Credentials
Master degree in Interantional Economics and Finance and diploma with honours in Business Administration from Canada.

Awards and Honors
Received First Prize in an inter-university Literary Contest.

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