If a country devalues its currency in terms of foreign currencies, what is the usual effect on its exports and imports?

Introduction / Context:
Currency devaluation is an important topic in international economics and Indian economy. When a country devalues its currency under a fixed or managed exchange rate system, the official value of its currency is lowered relative to foreign currencies. This directly affects the prices of exports and imports and is often used as a policy tool to correct trade imbalances. This question tests whether the learner understands the basic directional effect of devaluation on export and import prices.

Given Data / Assumptions:
- The country devalues its currency, meaning one unit of domestic currency now buys less foreign currency than before.
- We must determine what happens to export prices and import prices in foreign and domestic terms.
- We assume a standard framework where devaluation is significant enough to influence trade flows and prices.

Concept / Approach:
When a currency is devalued, each unit of domestic currency is worth less in foreign currency. For foreign buyers, the price of the country's exports becomes lower in their own currency because they now need fewer units of foreign currency to buy the same amount of domestic goods. For domestic consumers, the price of imported goods becomes higher in domestic currency because more units of domestic currency are needed to buy a given amount of foreign goods. Thus devaluation makes exports cheaper and imports costlier, which can help reduce trade deficits.

Step-by-Step Solution:
Step 1: Consider exports. Suppose one domestic good earlier cost 1 unit of domestic currency, which equalled some amount of foreign currency. After devaluation, 1 unit of domestic currency equals less foreign currency, so foreign buyers find the domestic good cheaper in their own currency. Step 2: Therefore, from the perspective of foreign buyers, exports from the devaluing country become cheaper and more competitive in international markets. Step 3: Now consider imports. If an imported good costs a fixed amount in foreign currency, after devaluation each unit of domestic currency buys less foreign currency. Step 4: This means domestic consumers must spend more units of domestic currency to obtain the same amount of foreign currency to buy the imported good, making imports costlier. Step 5: Hence, the general effect of devaluation is that exports become cheaper and imports become costlier.

Verification / Alternative check:
A simple numerical example can be used. Suppose before devaluation, 1 domestic unit equals 1 foreign unit. An export priced at 10 domestic units costs 10 foreign units. After devaluation, if 1 domestic unit equals only 0.5 foreign units, the same export priced at 10 domestic units now costs 5 foreign units, clearly cheaper for foreign buyers. Conversely, an import priced at 10 foreign units would earlier cost 10 domestic units but now costs 20 domestic units, making imports more expensive domestically. This confirms the conceptual reasoning.

Why Other Options Are Wrong:
Exports become costlier and imports become cheaper is wrong because it describes the opposite of devaluation. That situation resembles a revaluation or appreciation of the domestic currency.
Exports value is equivalent to imports value is wrong because devaluation does not automatically equalise export and import values; it only changes relative prices.
No effect on exports and imports is wrong because devaluation is specifically used to influence trade flows by changing prices in international markets.

Common Pitfalls:
Students sometimes get confused between devaluation and appreciation or revaluation. A helpful memory tip is to remember that when a currency is devalued, it becomes “weaker” relative to foreign currencies, so domestic goods look cheaper abroad and foreign goods look expensive at home. Another pitfall is ignoring time lags and assuming immediate large changes in trade volumes, but exam questions usually ask only about the direction of price changes, not the exact magnitude or timing of trade responses.

Final Answer:
When a country devalues its currency, exports become cheaper and imports become costlier in general.