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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
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?
- a)1 only
- b)1 and 2
- c)3 only
- d)2 and 3
Correct answer is option 'A'. Can you explain this answer?
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Verified Answer
Consider the following statements:The effect of devaluation of a curre...
Devaluation reduces the price of export items in foreign currency, thereby making it cheaper in foreign markets & hence making it price competitive. So, statement 1 is correct.
Devaluation makes domestic currency cheaper as compared to foreign currency, resulting in decreased foreign value of domestic currency. So, statement 2 is not correct.
Trade Balance in simplest terms would mean - the difference between the value of a country's exports and the value of a country's imports for a given period. A country's trade balance is positive or favorable (meaning that it registers a surplus) if the value of exports exceeds the value of imports & vice-versa. Devaluation makes exports cheaper in foreign country, but imports costly in the domestic country. For trade balance to improve, value of exports has to significantly rise as compared to value of imports. Although devaluation is done to improve the trade balance, the difference between the value of imports and exports as well as the preference of people in both
countries will determine the improvement or deterioration of the trade balance, and we cannot conclude that devaluation will necessarily improve trade balance. So, statement 3 is not correct.
countries will determine the improvement or deterioration of the trade balance, and we cannot conclude that devaluation will necessarily improve trade balance. So, statement 3 is not correct.
Therefore, the correct answer is (a).
Most Upvoted Answer
Consider the following statements:The effect of devaluation of a curre...
Devaluation of a currency refers to the deliberate reduction of the value of a currency relative to other currencies. This is done by altering the exchange rate of the currency in question. The effect of devaluation on the economy is often a subject of debate.
Effects of devaluation on the economy:
1. Improves the competitiveness of the domestic exports in the foreign markets: Devaluation makes exports cheaper and more attractive to foreign buyers, as they can now buy more goods for the same amount of foreign currency. This leads to an increase in demand for the country's goods and services, which can boost economic growth.
2. Increases the foreign value of domestic currency: Devaluation means that the domestic currency is worth less relative to other currencies. This can lead to an increase in the value of the currency in the foreign exchange markets, as investors seek to take advantage of the lower exchange rate. This can help to attract foreign investment to the country, which can boost economic growth.
3. Improves the trade balance: Devaluation can help to reduce the trade deficit, as it makes imports more expensive and exports cheaper. This means that the country is likely to import less and export more, which can improve the overall balance of trade.
Correct statement:
1. The effect of devaluation of a currency is that it necessarily improves the competitiveness of the domestic exports in the foreign markets.
This statement is correct as devaluation makes exports cheaper and more attractive to foreign buyers.
Incorrect statement:
2. The effect of devaluation of a currency is that it necessarily increases the foreign value of domestic currency.
This statement is incorrect as devaluation means that the domestic currency is worth less relative to other currencies. This can lead to a decrease in the value of the currency in the foreign exchange markets.
3. The effect of devaluation of a currency is that it necessarily improves the trade balance.
This statement is incorrect as devaluation can have a mixed effect on the trade balance, depending on various factors such as the elasticity of demand for imports and exports, the nature of the goods and services being traded, and the response of trading partners to the devaluation.
Effects of devaluation on the economy:
1. Improves the competitiveness of the domestic exports in the foreign markets: Devaluation makes exports cheaper and more attractive to foreign buyers, as they can now buy more goods for the same amount of foreign currency. This leads to an increase in demand for the country's goods and services, which can boost economic growth.
2. Increases the foreign value of domestic currency: Devaluation means that the domestic currency is worth less relative to other currencies. This can lead to an increase in the value of the currency in the foreign exchange markets, as investors seek to take advantage of the lower exchange rate. This can help to attract foreign investment to the country, which can boost economic growth.
3. Improves the trade balance: Devaluation can help to reduce the trade deficit, as it makes imports more expensive and exports cheaper. This means that the country is likely to import less and export more, which can improve the overall balance of trade.
Correct statement:
1. The effect of devaluation of a currency is that it necessarily improves the competitiveness of the domestic exports in the foreign markets.
This statement is correct as devaluation makes exports cheaper and more attractive to foreign buyers.
Incorrect statement:
2. The effect of devaluation of a currency is that it necessarily increases the foreign value of domestic currency.
This statement is incorrect as devaluation means that the domestic currency is worth less relative to other currencies. This can lead to a decrease in the value of the currency in the foreign exchange markets.
3. The effect of devaluation of a currency is that it necessarily improves the trade balance.
This statement is incorrect as devaluation can have a mixed effect on the trade balance, depending on various factors such as the elasticity of demand for imports and exports, the nature of the goods and services being traded, and the response of trading partners to the 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 balanceWhich of the above statements is/are correct?a)1 onlyb)1 and 2c)3 onlyd)2 and 3Correct answer is option 'A'. Can you explain this answer?
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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 balanceWhich of the above statements is/are correct?a)1 onlyb)1 and 2c)3 onlyd)2 and 3Correct answer is option 'A'. Can you explain this answer? for UPSC 2024 is part of UPSC preparation. The Question and answers have been prepared according to the UPSC exam syllabus. Information about 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 balanceWhich of the above statements is/are correct?a)1 onlyb)1 and 2c)3 onlyd)2 and 3Correct answer is option 'A'. Can you explain this answer? covers all topics & solutions for UPSC 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for 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 balanceWhich of the above statements is/are correct?a)1 onlyb)1 and 2c)3 onlyd)2 and 3Correct answer is option 'A'. Can you explain this answer?.
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