Undervaluation of Currency - Advantages and Disadvantages

The currency of a nation is said to be undervalued when its value in foreign exchange is low.

A cheaper (undervalued) currency renders the nation’s goods (exports) more affordable in the global market while making imports more expensive. After an intermediate period, imports will be forced down and exports to rise, thus stabilizing the trade balance and bring the currency towards equilibrium.

This topic would be of relevance to candidates in the Civil Service Exam conducted by UPSC, for more information on the exam, visit the given link IAS Exam.

Undervaluation and Overvaluation of Currencies – Difference

Undervaluation and overvaluation of currencies are majorly carried out with an objective of achieving the balance of trade.

Undervaluation of Currency Overvaluation of Currency
Appreciation of currency to achieve the balance of trade. Depreciating currency to achieve the balance of trade.

Advantages of Undervaluation of Currency

  1. Earnings of Exporters increases.
  2. Undervaluation makes imports expensive, therefore it helps in protecting the domestic companies from external competition, and helps in saving jobs and investments.
  3. Undervaluation of currency helps in attracting more investors.

Disadvantages of Undervaluation of Currency

  1. When imports get reduced due to undervaluation, it reduces competition among local companies.
  2. If the country has limited labour supply then it will end up increasing the wages which will result in an increase in inflation.
  3. If a tourist is travelling to another country then the undervalued currency will not be helpful.

Undervaluation of Currencies – Latest News

  1. Anti-subsidy duties will be imposed on products, from countries that undervalue their currencies against Dollar.
  2. This new rule would only be applicable to imports that harm the domestic industries in the US.
  3. As per some experts, these rules would not be in alignment with the trade rules framed by the World Trade Organisation.

Aspirants preparing for the upcoming Civil Services Exam can check the following links for comprehensive preparation –

Undervaluation of Currency- UPSC Notes:- Download PDF Here

The above details would help candidates preparing for UPSC 2021

Frequently Asked Questions on Undervaluation of Currency

Q 1. What is the meaning of Currency Undervaluation?

Ans. The currency of a nation is said to be undervalued when its value in foreign exchange is low. Undervaluation and overvaluation of currencies are majorly carried out with an objective of achieving the balance of trade.

Q 2. Is there are an advantage of currency devaluation?

Ans. Yes, undervaluation can be beneficial. Undervaluation makes imports expensive, therefore it helps in protecting the domestic companies from external competition, and helps in saving jobs and investments.

Q 3. How many times India devalue currency?

Ans. India has faced the devaluation of currency twice. Once in the year 1966 and later in 1991.

Q 4. What is the disadvantage of the devaluation of currency?

Ans. When imports get reduced due to undervaluation, it reduces competition among local companies. This is one of the biggest disadvantages of the devaluation of the currency.

Q 5. Can devaluation lead to Inflation?

Ans. Yes, devaluation can result in inflation as a decline in the value of a currency makes exports more competitive and imports more expensive, thus, increasing inflation.

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