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

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? ​

CollectorBabu · Accepted Answer

Correct Answer: 1 only ​. Statement 1 is correct: A weak domestic currency makes a nation's exports more competitive in global markets, and simultaneously makes imports more expensive. Statement 2 is incorrect: A key effect of devaluation is that it makes the domestic currency cheaper relative to other currencies. Statement 3 is incorrect: the valuation does not necessarily improve the trade balance especially when the import of a country is more than the export. This is because while revaluation increases the export, it makes the imports more expensive.

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