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Q99 (IAS/1999) Economy › External Sector & Trade › Open economy basics Answer Verified

Assertion (A) : Devaluation of a currency may promote export. Reason (R) : Price of the country’s products in the international market may fall due to devaluation.

Result
Your answer: —  ·  Correct: A
Explanation

Devaluation makes the domestic currency cheaper in terms of foreign currency, which tends to raise the foreign-currency competitiveness of domestic goods and thus can boost export volumes. Textbook discussion explicitly notes that when the currency weakens (depreciation/devaluation) exports are likely to rise and that governments devalue to make exports cheaper and imports costlier, illustrated with price-exchange examples [2]. Empirical and policy sources also describe that devaluation (or deliberate devaluation) lowers relative export prices abroad and can therefore promote exports by making domestic products more attractive to foreign buyers [3]. The magnitude of the effect depends on demand elasticities and other real-world constraints.

Sources

  1. [1] Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 17: India’s Foreign Exchange and Foreign Trade > WHICH EXCHANGE RATE SYSTEM SUITS AN ECONOMY BEST? > p. 495
  2. [2] Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > Before 1993: > p. 40
  3. [3] https://blogs.worldbank.org/en/trade/how-exports-react-to-exchange-rate-fluctuations--and-what-it-mea
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SIMILAR QUESTIONS

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Assertion (A) : The rate of growth of India’s exports has shown an appreciable increase after 1991. Reason (R) : The Govt. of India has resorted to devaluation.

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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?

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Which of the following is/are the effects of devaluation or depreciation of currency ? 1. It leads to increase in imports and decrease in exports. 2. It leads to increase in exports and decrease in imports. 3. It leads to increase in domestic inflation. 4. It leads to decrease in domestic inflation. Select the correct answer using the code given below : (a) 1 and 3 only (b) 2 and 3 only (c) 1 and 4 only (d) 3 only

IAS · 2003 · Q102 Relevance score: 1.04

Assertion (A) : During the year 2001 - 02, the value of India’s total exports declined, registering a negative growth of 2.17%. Reason (R) : During the year 2001 - 02, negative growth in exports was witnessed in respect of iron and steel, coffee, textiles and marine products.