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Economics. Qs. Devaluation of Currency ?

Kindly answer and explain the question.

Qs. Devaluation of currency will be more beneficial if the prices of?
a.domestic goods remain constant
b.exports become cheaper to importers
c.imports remain constant
d.exports rise proportionally.

Ans: b, asked in CDS, UPSC 2017.

Comments

  • edited March 17
    In this case, it's a fill in blanks question. Assume trade is balanced and devaluation occurs. This makes the analysis simpler.

    Trade balance = export earning - import bill

    When devaluation occurs,
    Export earning rises - export price lower, more demand for it while Import is more expensive and less demand.

    So trade balance is supposed to improve

    Option D automatically eliminated. Export price rise leads to fall in export earnings and worsens trade balance.

    Option A prices doesn't relate to trade balance. So we can exclude this too.

    Option C means import bill is unchanged - price of imported same, so unchanged demand. Export earning rises compared to before. So positive trade balance

    Option B means exports are more competitive. Trade balance improves by a greater magnitude than option C case as import bill also reduces.

    Hence it is the appropriate answer.

    An example,
    TB = 0
    X earning = 12 = import bill
    Devaluation happens

    If import bill same at 12 while X earing rises to 13, positive balance of 1.

    If import bill also falls to 11, trade balance even better now at (13-11 = 2) instead.

    Since the question mentions nothing about exact prices and quantities, J curve effect etc, the above logic works.
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