Civil Services Examination · Question 8
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 statements given above is/are correct?
Show answer & explanation
Answer: (A) 1 only
Explanation
Devaluation makes exports cheaper abroad, but it lowers the external value of the currency. It does not necessarily improve the trade balance (J-curve, inelastic demand).