Identify the correct pair of statements given in Column I with the related terms in Column II : Column I : 1.

Question 55 of 77

Q. Identify the correct pair of statements given in Column I with the related terms in Column II : Column I : 1. Remittances from abroad to the nation ; 2. Government's policy of decreasing the value of the nation's currency against foreign currencies ; 3. Difference between visible exports and visible imports of a nation ; 4. Government as sole authority of determining foreign exchange rates. Column II :

(i) Accommodating Transaction ;

(ii) Devaluation ;

(iii) Balance of Payments ;

(iv) Flexible Exchange Rate System. Alternatives : (A) 1 →

(i) (B) 2 →

(ii) (C) 3 →

(iii) (D) 4 → (iv)

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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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The correct pair identifies the government's policy of decreasing currency value as devaluation.

Understanding the dynamics of international trade and finance requires familiarity with several key concepts, particularly those related to a nation's interactions with the global economy. These include how a country pays for its imports, earns from its exports, and how the value of its currency is determined. The Balance of Payments (BoP) and exchange rate systems are central to this understanding.

Let us examine each statement and its potential match:

Remittances from abroad to the nation:

Remittances are transfers of money by foreign workers to their home country. These are essentially unilateral transfers, meaning they are one-way payments without any corresponding goods or services in return. In the context of a nation's Balance of Payments, remittances are recorded in the Current Account, specifically under "unrequited transfers" or "unilateral transfers." They represent an inflow of foreign exchange for the recipient nation.
- (i) Accommodating Transaction: Accommodating transactions are those capital account transactions undertaken to cover the deficit or surplus in the autonomous transactions (which are undertaken for profit motive). Remittances are autonomous current account transactions, not accommodating capital transactions.
- (iii) Balance of Payments: While remittances are part of the Balance of Payments, the term "Balance of Payments" itself refers to a systematic record of all economic transactions between the residents of a country and the rest of the world during a specific period. It is not a term specifically for remittances.
Government's policy of decreasing the value of the nation's currency against foreign currencies:

The value of a nation's currency can change relative to other currencies. When this change is a deliberate policy decision by the government or central bank in a fixed exchange rate system, it has a specific name.
- (ii) Devaluation: Devaluation refers to the deliberate downward adjustment of a country's currency value relative to another currency, group of currencies, or standard. This is a policy action taken by the government or central bank, typically in a fixed exchange rate regime, to make exports cheaper and imports more expensive, aiming to improve the balance of trade. In contrast, depreciation is a fall in the currency's value due to market forces in a flexible exchange rate system. Given the statement specifies "Government's policy," devaluation is the precise term.
Important

Devaluation is a government policy action in a fixed exchange rate system, while depreciation is a market-driven fall in currency value in a flexible exchange rate system.
Difference between visible exports and visible imports of a nation:

International trade involves both visible (merchandise) and invisible (services) items.
- Visible exports and imports refer to the trade in physical goods, such as machinery, textiles, or agricultural products.
- The Balance of Trade (BoT) is specifically the difference between the value of a country's visible exports and its visible imports over a period. A surplus occurs if exports exceed imports, and a deficit if imports exceed exports. …

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