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

QUESTION

Easy

Economy

Prelims 2021

Consider the following statements: The effect of devaluation of a currency is that it necessarily:-

improves the competitiveness of the domestic exports in the foreign markets.
increases the foreign value of domestic currency.
improves the trade balance.

Which of the above statements is/are correct?

Select an option to attempt

Explanation

Statement 1 is correct. When a country devalues its currency, it becomes cheaper for foreign buyers to purchase the country's exports. This can lead to increased demand for exports, making domestic producers more competitive in the international market.

Statement 2 is incorrect. Devaluation actually decreases the foreign value of the domestic currency. The whole point is to make the domestic currency less expensive relative to foreign currencies.

Statement 3 is also incorrect. While improved export competitiveness can lead to a better trade balance (more exports, fewer imports), it's not a guaranteed outcome. Other factors like import prices, global demand, and domestic production costs can also influence the trade balance. Devaluation can also lead to increased import costs if the country relies on imported raw materials.

Therefore, the correct code is 1 only.

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