Consider the following statements: The effect of the devaluation of a currency is that it necessarily: 1. Improves the competitiveness of domestic exports in the foreign markets. 2. Increases the foreign value of the domestic currency 3. Improves the trade balance Which of the above statements is/are correct?

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YESPYQ · Accepted Answer

Correct answer: 1 only. Statement 1 is correct : Devaluation is a decrease in the value of a country’s currency relative to other cur- rencies. It means it takes more of the domestic currency to buy one unit of a foreign currency. For example, if the exchange rate changes from ₹70 to ₹80 per dollar, the rupee has been deval- ued. Devaluation makes a country’s exports cheaper for foreign buyers. This can increase demand for exports, leading to higher export volumes and potentially improving the trade balance (ex- ports minus imports). Statement 2 is incorrect : Devaluation means a decrease(not increase) in the value of the domestic currency relative to foreign currencies. It takes more of the domestic currency to buy one unit of a foreign currency. Statement 3 is incorrect : Devaluation can potentially im- prove the trade balance over time by boosting exports and reducing imports, but it is not guaranteed. The trade balance may deteriorate because import costs rise immediately, while export volumes may take time to increase. This phenomenon is called the J-curve effect. If a country d

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