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?

(a) 1 only ✓ UPSC's answer
(b) 1 and 2
(c) 3 only
(d) 2 and 3

Why the answer is (a)

• Devaluation lowers the external value of the domestic currency, making exports cheaper in foreign currency and imports dearer at home.

• Statement 1 is correct: exports necessarily become more price-competitive abroad.

• Statement 2 is wrong: devaluation decreases, not increases, the foreign value of the domestic currency.

• Statement 3 is wrong: improvement in the trade balance is not guaranteed — it depends on the price elasticities of exports and imports (the Marshall–Lerner condition) and may even worsen initially (the J-curve).

• Hence 1 only, option (a).

Why the other options are wrong

(b) 1 and 2: Statement 2 is wrong: devaluation lowers the currency's foreign value.
(c) 3 only: Statement 3 is wrong: trade balance improvement is not assured.
(d) 2 and 3: Statements 2 and 3 are both wrong.

Asked in the GS Paper I of the UPSC Civil Services Preliminary Examination 2021, held on 10 October 2021. Question and answer key: Union Public Service Commission. Explanation: UPSC Answer Check.