‘‘US dollar has recorded a jump of 0·75 paise per dollar (p/\) in the last one month; this situation might bri

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Q. ‘‘US dollar has recorded a jump of 0\cdot75 paise per dollar (p/$) in the last one month; this situation might bring smiles and sorrows to different types of traders (exporters and importers).’’ Justify the given statement.

Lakshadweep CbseCBSE Class XII Board 2020Subjective· 4mImportance★★★★★

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Concept understanding — Currency Devaluation Depreciation

Let’s start with something you already know. Suppose you have ₹100 and you want to buy a toy that costs $2. If the exchange rate is ₹50 =$ 1, you can buy exactly one toy. Now imagine the rate changes to ₹100 = $1. Your ₹100 now buys only$ 1 — you can no longer afford the toy. The rupee has become weaker relative to the dollar. That’s the everyday feeling of a currency losing value.

What is Currency Depreciation?

Depreciation is the fall in the value of one currency in terms of another currency under a flexible (floating) exchange rate system. In this system, the market — supply and demand for currencies — decides the rate. If more people want to sell rupees and buy dollars, the rupee’s price falls. That’s depreciation.

Example: If the rate moves from ₹70/ $to ₹80/$ , the rupee has depreciated. Each dollar now costs more rupees.

Note

Depreciation happens automatically in a floating rate system. It is not a government decision — it’s a market outcome.

What is Currency Devaluation?

Devaluation is the official reduction in the value of a currency by the government or central bank under a fixed exchange rate system. Here, the government pegs the currency to another currency (say, the dollar) and then deliberately lowers that peg.

Example: If the government had fixed ₹70/ $and then announces a new fixed rate of ₹80/$ , that’s devaluation.

Watch out

Many students mix these up. Remember: Depreciation = market-driven fall (floating rate). Devaluation = government-driven fall (fixed rate). The effect is similar — your currency buys less foreign currency — but the cause is different.

Why Does It Matter? The Real Effects

1. Exports become cheaper, imports become costlier

When the rupee depreciates (or is devalued), Indian goods become cheaper for foreigners. A shirt that costs ₹500 earlier cost $10 at ₹50/$ . Now at ₹100/ $, it costs only$ 5. Foreign buyers buy more — exports rise.

But the reverse is painful. An imported laptop that cost $1000 earlier cost ₹50,000. Now it costs ₹1,00,000. Imports become expensive, hurting consumers and industries that rely on foreign raw materials.

2. Impact on the trade balance

If exports rise and imports fall, the trade deficit (exports minus imports) may shrink. But this is not guaranteed — if demand for imports is inelastic (people must buy them anyway), the import bill actually rises in rupee terms.

3. Inflation pressure

Since imported oil, machinery, and components cost more, production costs rise. Firms pass this on to consumers. This is called imported inflation.

4. Debt burden

If India has borrowed in dollars, a weaker rupee means we need more rupees to repay the same dollar debt. This increases the burden on the government and companies.

The Formula (Yes, there is one — but it’s simple)

The NCERT textbook does not give a separate formula for depreciation/devaluation itself. But the concept is tied to the exchange rate:

\text{Exchange Rate} = \frac{\text{Price of domestic currency}}{\text{Price of foreign currency}}

More commonly, we write it as:

\text{₹ per $} = \frac{\text{₹}}{\text{$}}

If this number rises, the domestic currency (₹) has depreciated or been devalued.

There is also the percentage change formula:

\text{Percentage depreciation} = \frac{\text{New rate} - \text{Old rate}}{\text{Old rate}} \times 100

Example: Rate goes from ₹70/ $to ₹80/$ .

\frac{80 - 70}{70} \times 100 = 14.3\%

The rupee has depreciated by 14.3% against the dollar.

Tip

Always check which currency is in the denominator. If the denominator currency strengthens, the numerator currency weakens. A rising ₹/$ rate means the rupee is falling.

A Diagram in Words

Draw a standard supply-and-demand graph for dollars. On the vertical axis, put “₹ per $” (the exchange rate). On the horizontal axis, put “Quantity of$ ”. …

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A 0.75 paise per dollar jump signifies dollar appreciation (rupee depreciation), which benefits exporters by increasing their rupee earnings and hurts importers by raising their rupee costs.

The statement describes a common scenario in international trade: a change in the exchange rate between two currencies, specifically the US dollar and the Indian rupee. To understand why this brings both "smiles and sorrows," we need to grasp the fundamental concept of currency valuation and how it affects businesses dealing in foreign trade.

When we say the "US dollar has recorded a jump of 0.75 paise per dollar," it means that the value of one US dollar, when expressed in Indian rupees, has increased by 0.75 paise. For instance, if the exchange rate was $1 = \text{Rs. } 80.00$ a month ago, it is now $1 = \text{Rs. } 80.0075$ . This situation is known as the appreciation of the US dollar or, equivalently, the depreciation of the Indian rupee.

Important

Dollar Appreciation / Rupee Depreciation:

This means that to buy one US dollar, you now need to pay more Indian rupees than before. Conversely, if you have one US dollar, you can now exchange it for more Indian rupees.

Let's break down the impact on exporters and importers.

Understanding the Exchange Rate Change:

The phrase "0.75 paise per dollar jump" means that the rupee equivalent of one dollar has increased.

If the old exchange rate was $1 = \text{Rs. } X$ , the new exchange rate is $1 = \text{Rs. } (X + 0.0075)$ .

This indicates that the US dollar has become stronger relative to the Indian rupee.
Impact on Exporters (Smiles):

Exporters are businesses that sell goods or services from India to other countries, typically receiving payment in foreign currency, such as US dollars.
- When an Indian exporter sells goods worth, say, $1000$ to a US buyer, they receive $1000$ .
- Before the jump, if $1 = \text{Rs. } X$ , the exporter would convert their $1000$ into $1000 \times X$ rupees.
- After the jump, with $1 = \text{Rs. } (X + 0.0075)$ , the same $1000$ dollars will now convert into $1000 \times (X + 0.0075)$ rupees.
- This means the exporter receives an additional $1000 \times 0.0075 = \text{Rs. } 7.50$ for the same dollar amount. Since they get more rupees for the same amount of foreign currency earned, their revenue in rupee terms increases, leading to higher profits or improved competitiveness. This brings "smiles" to exporters.
Impact on Importers (Sorrows):

Importers are businesses that buy goods or services from other countries into India, typically needing to pay in foreign currency, such as US dollars. …

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Q.‘‘US dollar has recorded a jump of 0·75 paise per dollar (p/$) in the last one month; this situation might bring smiles and sorrows to different types of traders (exporters and importers).’’ Justify the given statement.

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