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?
Show answer
Answer: A. Statement 1 is correct: devaluation makes exports cheaper abroad, so they become more competitive. Statement 2 is wrong: devaluation lowers the foreign value of the currency. Statement 3 is wrong: the trade balance does not necessarily improve, since it depends on how demand for exports and imports responds. So only 1.
Watch for: The word 'necessarily' rules out the trade balance; improvement is likely but not certain.
Why the other options are wrong
- B. Wrong because devaluation reduces, not increases, the currency's foreign value.
- C. Wrong because trade balance improvement is not guaranteed.
- D. Wrong because both 2 and 3 are false.
Source to check: NCERT Class 12, Introductory Macroeconomics, Chapter 6 Open Economy Macroeconomics
Answer from the official UPSC key. Written and fact-checked by AI against the official key. Spotted a mistake? Report it.