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 above statements is/are correct?
Answer & explanation
Answer: (a) 1 only
Devaluation makes the domestic currency cheaper, so the country's goods become cheaper for foreign buyers. That is its one certain effect. It lowers, not raises, the currency's foreign value, and whether the trade balance improves depends on how exports and imports respond, so it is not guaranteed.
- ✓ 1. A cheaper rupee means a foreign buyer pays fewer dollars for the same Indian product, so exports become more price-competitive.
- ✗ 2. Devaluation is an official act that raises the exchange rate, making the domestic currency cheaper; its foreign value falls.
- ✗ 3. The trade balance improves only if export and import volumes respond enough; if imports such as crude oil cannot be cut, the import bill can rise and the balance may worsen.
Remember · Devaluation (fixed rate, by government) and depreciation (market-driven) both make the home currency cheaper; exports gain competitiveness, but the trade balance need not improve.
📘 Read it in NCERT: Class 12 Introductory Macroeconomics, Ch 6 (practise this chapter) · Class 12 Introductory Macroeconomics, Ch 6 (practise this chapter) · Class 12 Introductory Macroeconomics, Ch 6 (practise this chapter)
Sources
- NCERT Class 12 · Introductory Macroeconomics, Chapter 6 “In a fixed exchange rate system, when some government action increases the exchange rate (thereby, making domestic currency cheaper) is called Devaluation.”
- NCERT Class 12 · Introductory Macroeconomics, Chapter 6 “A rise in price of foreign exchange will reduce the foreigner's cost (in terms of USD) while purchasing products from India, other things remaining constant.”
- NCERT Class 12 · Introductory Macroeconomics, Chapter 6 “whether it actually increases depends on a number of factors, particularly elasticity of demand for exports and imports.”
Question and answer: UPSC's official GS Paper I (2021, Series A) — paper ↗ · answer key ↗. Explanation: Minimalist IAS, checked 30 Sept 2026 (how we verify). ·