UPSC CSE Prelims
Question 79
Consider the following statements: The effect of devaluation of a currency is that it necessarily
- improves the competitiveness of the domestic exports in the foreign markets
- increases the foreign value of domestic currency
- improves the trade balance
Which of the above statements is/are correct?
View correct answer and explanation
Correct answer: A
Correct Option: A (1 only)
Explanation: Official devaluation lowers the foreign-currency price of domestic products, tending to improve export-price competitiveness. It does not raise the domestic currency’s foreign value or necessarily improve the trade balance.
Statement / Pair / Item-wise Analysis:
1. Correct / qualifies - A weaker currency makes domestic exports cheaper in foreign currency, other things equal.
2. Incorrect / does not qualify - Devaluation decreases, not increases, the external value of the currency.
3. Incorrect / does not qualify - Trade balance may not improve due to import bills, demand elasticities and J-curve effects.
Option-wise Analysis:
A. Correct-selects exactly the supported statements/items: 1.
B. Incorrect-includes item 2, which is not valid (Devaluation decreases, not increases, the external value of the currency).
C. Incorrect-includes item 3, which is not valid (Trade balance may not improve due to import bills, demand elasticities and J-curve effects); omits valid item 1 (A weaker currency makes domestic exports cheaper in foreign currency, other things equal).
D. Incorrect-includes item 2, which is not valid (Devaluation decreases, not increases, the external value of the currency); includes item 3, which is not valid (Trade balance may not improve due to import bills, demand elasticities and J-curve effects); omits valid item 1 (A weaker currency makes domestic exports cheaper in foreign currency, other things equal).
Review note: The question treats export-price competitiveness as improving ceteris paribus; actual export volumes/margins can vary.