Question

“Depreciation of currency may promote exports of a nation.” 
Defend or refute the given statement with valid arguments.

Hint:

Currency depreciation enhances a nation's export competitiveness by reducing the price of its goods in foreign markets, increasing global demand. However, it can also raise import costs, leading to inflation.

Answer 1

The given statement is defended. When the domestic currency of an economy depreciates, it means that its value has declined relative to foreign currencies. This depreciation makes domestically produced goods and services relatively cheaper in international markets compared to foreign goods. As a result, international buyers find it more cost-effective to purchase goods from the depreciating country, leading to an increase in exports. Mechanism of Currency Depreciation and Its Impact on Exports: Increase in Export Competitiveness: When a country's currency depreciates, its products become more affordable for foreign consumers, making the country's exports more competitive in global markets. Higher Foreign Demand: Due to lower prices, foreign buyers prefer purchasing goods and services from the country experiencing depreciation, stimulating production and employment. Trade Balance Improvement: A rise in exports helps improve the trade balance by increasing the inflow of foreign exchange, reducing trade deficits or achieving a trade surplus. Effect on Domestic Producers: Increased demand for exports benefits domestic industries by boosting sales and profitability, leading to expansion in production and investment. Potential Drawbacks: While depreciation promotes exports, it can also increase import costs, making foreign goods more expensive for domestic consumers and leading to inflation. Example: If the Indian rupee depreciates against the US dollar (e.g., from ₹75/USD to ₹85/USD), Indian goods become cheaper for American buyers, making Indian exports more attractive and increasing foreign exchange earnings.
Conclusion:
Depreciation of a currency generally promotes exports by making them more competitive in global markets. However, it is important to monitor inflation and import costs to ensure economic stability.