What is devaluation? Under what conditions will devaluation improve a country's balance of payment position...

Explanation

(a) Devaluation means a fall in the exchange value of a country's currency in relation to the currencies of other countries. It is the reduction of the value of a country's currency in relations to the currencies of other nations.

(b) Devaluation will improve the balance of payment of a country under the following conditions:

(i) The elasticity of demand for imports must be elastic. Increase in prices of imports, as a result of devaluation will reduce the demand for import.

(ii) The country's export must have elastic demand in other countries.

(iii) Other nations should not devalue their own currencies

(iv) For devaluation to be effective, there must be no increase in wages and other incomes.