Q. Consider the following statements: The effect if devaluation of a currency is that it necessarily
1. Improves the competitiveness of the domestic export 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?
Why this question) Recently, the Indian rupee depreciated below the 74 levels against the US dollar.
Exp) Option a is correct.
A devaluation means there is a fall in the value of a currency. The main effects are:
Statement 1 is correct.
Exports are cheaper to foreign customers: If the value of the rupee decreases against the dollar, the price of the cars sold by Indian manufacturers in America, in dollars, will be effectively less expensive than they were before. On the other hand, a more valuable currency makes exports relatively more expensive for purchase in foreign markets.
Statement 2 and 3 are incorrect.
Devaluation of a currency decreases the foreign value of domestic currency.
Devaluation also increases the debt burden of foreign-denominated loans when priced in the home currency. Thus, devaluation may not improve the trade balance in the long run.