Theory question 109
Balance of Payments and Exchange Rates(a) What is (i) devaluation; (ii) depreciation of currency?
(b) Outline three measures that can be adopted to correct balance of payments deficit.
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(a)(i) Devaluation: a deliberate official reduction by government of the value of its currency in terms of other currencies (under a fixed exchange rate).
(ii) Depreciation: a fall in the value of a currency caused by market forces of demand and supply (under a floating exchange rate).
(b) Any three: devaluation; import restrictions (tariffs, quotas, bans); export promotion (subsidies, incentives); exchange control; deflationary monetary and fiscal policy; foreign borrowing/use of reserves; import substitution; encouraging foreign investment.
Devaluation is a government decision; depreciation is market-driven.