The effect of devaluation of a currency is that it necessarily
1. improves the competitiveness of the domestic

Question

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 statements given above is/are correct?

Accepted Answer

Devaluation makes domestic goods cheaper for foreign buyers, thus enhancing their competitiveness in international markets. Consequently, this typically leads to an increase in exports and a decrease in imports. This shift in trade flow, assuming other factors remain constant, tends to improve the country's trade balance by reducing the trade deficit or increasing the surplus.