🧷 Authentic Classroom Explanation | IAS Monk

📌 The 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 above statements is/are correct?
(a) 1 only
(b) 1 and 2
(c) 3 only
(d) 2 and 3

📌 Answer: (a)

🧠 Classroom Explanation

🔹 Core Concept: What is devaluation?

Devaluation refers to an official downward adjustment in the value of a country’s currency under a fixed or managed exchange rate system.
It means more units of domestic currency are required to buy one unit of foreign currency.

🔍 Statement-wise Analysis

✅ Statement 1: Improves export competitiveness — Correct

When a currency is devalued:

• Domestic goods become cheaper in foreign currency terms.
• This makes exports more attractive and competitive in global markets.

✔️ Hence, statement 1 is necessarily true.

❌ Statement 2: Increases foreign value of domestic currency — Incorrect

Devaluation means:

• The foreign value of domestic currency falls, not rises.

📌 Example:
If earlier $1 = ₹50 → ₹1 = $0.02
After devaluation $1 = ₹100 → ₹1 = $0.01

✔️ Domestic currency loses foreign value.

❌ Hence, statement 2 is incorrect.

❌ Statement 3: Improves trade balance — Not necessarily true

Although exports may rise, trade balance depends on:

• Import elasticity,
• Composition of imports (e.g., crude oil, fertilizers),
• J-curve effect.

📌 In economies like India, where essential imports are inelastic, the import bill may rise sharply, worsening the trade balance.

❌ Hence, improvement in trade balance is not guaranteed.

✅ Final Answer Logic

Only Statement 1 is necessarily true.

➡️ Correct answer: (a) 1 only

🔍 Curiosity Raiser

Why does India often experience a widening trade deficit immediately after sharp rupee depreciation, despite rising exports?

🧘 IAS Monk Whisper

A weaker currency can sell more goods,
but it can also buy costlier necessities.
Competitiveness is gained, balance is not promised.