Question

Critically comment on the following statements as they refer to middle-income developing countries (1 page)

"Currency overvaluation keeps the rate of profit low, thus reducing the rate of investment and rate of economic growth."

Answer 1

When the currency is overvalued the export becomes expensive which means domestic goods in foreign markets are expensive and it makes the goods manufactured by domestic manufacturer uncompetitive because the profit on single unit is high but overall or total profit will decline because the price of domestic goods will be higher in foreign market and due to it quantity of exports will fall and overall export will come down and since the exports will fall the foreign exchange reserve will also starts declining and when exports are low the incentive to invest and open new industry will decline as a result of it growth will decline .

When the currency is overvalued the imports becomes cheap which means foreign goods in domestic markets are cheap and demand for imported goods increases because foreign good prices becomes cheap and it becomes highly competitive to domestic produced goods and as a result it hurts domestic manufacturers and foreign good substitute domestic goods and it brings foreign exchange reserve and investment down which hurts the economic growth.

To overcome this problem china always tried to devalue its currency to make its export competitive and India also devalued its currency in 1991 to make its export competitive and give protection to its domestic industry and reduce its import and by this these two countries attained high economic growth and became fastest growing economy in the world