Effect of a currency devaluation: Identify the most likely trade impact. Full question: Devaluation of a country's currency leads to which of the following outcomes for exports and imports? Choose the correct option.
General Knowledge
Indian Economy
Difficulty: Easy
Choose an option
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AExports become cheaper abroad; imports become costlier at home; trade balance tends to improve
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BExports become costlier abroad; imports become cheaper; trade balance tends to worsen
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CNo change in relative prices; only capital flows are affected
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DBoth exports and imports become cheaper in domestic currency terms
Answer
Correct Answer: Exports become cheaper abroad; imports become costlier at home; trade balance tends to improve
Explanation
Given data
- Policy: Devaluation (a discrete reduction in the domestic currency's external value under a fixed/managed regime).
Concept / Approach Devaluation lowers the foreign-currency price of domestic goods (boosts exports) and raises the domestic-currency price of foreign goods (restrains imports). If Marshall–Lerner condition holds, the trade balance improves.
Step-wise intuition PXforeign ↓ ⇒ X ↑; PMdomestic ↑ ⇒ M ↓ ⇒ (X − M) improves, ceteris paribus.
Final Answer Exports cheaper, imports dearer, trade balance tends to improve.