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?
Devaluation means the official lowering of the value of a country’s currency within a fixed exchange rate system. Devaluation of a currency happens in countries with a fixed exchange rate or in cases where it is managed as a floating rate which increases the competitiveness of the domestic exports in foreign markets. Hence, statement 1 is correct and statement 2 is wrong Regarding the third statement, while the devaluation of currency can improve the competitiveness of exports, the trade balance depends on both exports and imports. It is not necessarily true that devaluation of currency improves the trade balance. Therefore, statement 3 is not correct.