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 bal

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Q: (IAS/2021)
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_subject: 

Economics

question_exam: 

IAS

stats: 

0,317,175,317,86,58,31

keywords: 

{'devaluation': [0, 3, 0, 3], 'trade balance': [0, 0, 0, 1], 'foreign value': [0, 0, 0, 1], 'domestic currency': [0, 0, 0, 1], 'currency': [0, 1, 0, 3], 'domestic exports': [0, 0, 0, 1], 'foreign markets': [0, 0, 0, 1], 'effect': [4, 0, 2, 7]}

The correct answer is option 1 only.

Devaluation of a currency means a deliberate downward adjustment in the official exchange rate. It has the following effects:

Improves the competitiveness of the domestic exports in the foreign markets: A devaluation makes the exports cheaper in the foreign markets and can increase the demand for the domestic products. Thus, it can help to improve the trade balance.

Increases the domestic value of foreign currency: After devaluation, the domestic currency becomes weaker compared to the foreign currencies. This makes the foreign currency more expensive in the domestic market.

Does not necessarily improve the trade balance: Devaluation can improve the trade balance by making exports cheaper and imports expensive, but it is not a guarantee. It also depends on other factors such as the elasticities of demand and supply, production capacity, and market conditions.

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