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. Increase the foreign value of domestic currency

3. Improves the trade balance

Which of the above statements is/are

(a) 1 only

(b) 1 and 2

(c) 3 only

(d) 2 and 3

Answer 1

Correct option is (b) 1 and 2

• Devaluation of the local currency example IF RBI notifying that henceforth "$1 = ₹90 instead of $1 = ₹70".
• Such devaluation will improve the trade competitiveness of the domestic exports, because the foreign importers may be able to buy more quantity of Indian goods with the same quantity of dollars. Then if previously foreigners were importing tea from Ethiopia, Sri Lanka or Kenya, now foreigners may start doing it from India. Statement 1 is right. We are 50:50 between A or B. Now answer depends on the validity of the statement 2.
• Devaluation: $1 = ₹70 → $1 = ₹90. Here the foreign value of domestic currency will be ₹1 = $0.014 downgraded/reduced to ₹1 = $0.011. So, 2 is wrong. → B & D eliminated.