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Why do countries devalue their currencies? - Tell me why - YouTube
Channel: The Explained Channel
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On 6th June, 1966 India, hit by drought after
two major wars (with China and Pakistan),
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devalued rupee by 57 % from Rs.4.76=$1 to
Rs.7.50 = $1.
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Why was the devaluation done and what makes
a country devalue its currency!
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Let us imagine this hypothetical scenario.
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Far away in a deep deep space, there was a
planet similar to our earth, where civilization
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had just started to emerge.
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It had three states Kumarville, Huville and
Johnville.
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Citizens of these states were all hardworking
and self sufficient producing their own daily
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requirements of rice, brick and clothes.
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Things were going great.
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As time passed inhabitants of Johnville found
a new faster way of making bricks.
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Thus they started making more bricks than
required.
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Since they had some extra bricks they thought
of selling some bricks to the inhabitants
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of Huville who couldn鈥檛 produce more because
they were going through a rainy season.
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Huville guys thankfully gave some extra rice.
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Johnville guys didn't need much rice, so they
were willing to offer only one brick for every
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10 bags of rice.
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Meanwhile kumarville is going through a drought
season.
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Their rice production was going down and life
was getting pretty tough.
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Before things could heat up, Kumarville guys
purchased 10 bags of rice from Johnville guys
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in return of 10 pair of clothes.
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Since the exchanging process was complex the
tribal leader of Johnville, let us call him
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crimton, started minting some special coins
and calls them daluro.
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He sets an exchange rate of 1 brick = 1 daluro.
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Thus, Huville and Kumarville guys need to
get these Daluro to buy stuff from Johnville
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guys.
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Inspired by Johnville, the tribes of Kumarville
and Huville give colorful names Rapi and Rambi
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to their own coins.
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1 Rapi is set as 10 pair of clothes and 1
Rambi is set as 10 bags of rice.
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These coins are then used among the villagers
to buy and sell stuff among themselves.
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At the current rate: 1 Rapi = 1 Rambi = 1
Daluro.
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Life is so good for Johnville people as they
are getting a lot of , clothes and rice without
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working much.
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The drought in Kumarville ends and they start
producing a lot of rice.
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Now, they are not in that need for the rice
from Johnville and have a less need for Daluro.
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As rice is required less, Kumarville guys
are willing to sell only 5 clothes for every
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10 bags of rice.
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By previous equations, now 1 Rapi = 10 clothes
= 20 bags of rice = 2 Daluro.
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In the meanwhile, Huville have adapted a part
of brick building process and have started
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producing enough bricks.
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They are now less willing to buy bricks from
Johnville.
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They now set 1 Rambi = 10 bags of rice = 3
bricks = 3 Daluro.
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This leaves the Johnville tribes with no options
but to devalue their currency to accept the
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reality that 1 Daluro = 0.5 Rapi = 0.33 Rambi.
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So this is how countries recognize that their
currency is significantly less than what it
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used to be.
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And thus suddenly devalue their own currency!
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I got lot of amazing questions via facebook
and youtube comments asking to make videos
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on astronomical, historical, biological field.
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I have never covered any topic related to
economics on this channel earlier.
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So thought this as a great opportunity and
made a video on devaluation as requested by
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Ramsey.
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Got some amazing questions on YouTube comments
sections too.
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I tried my best to answer most of them.
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Keep asking more questions as who knows your
question will get featured in the next video
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along with the answer.
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So what鈥檚 your next question?
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We are waiting :)
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