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?

Answer: A. Only statement 1 is correct; 2 and 3 are wrong. DEVALUATION refers to a deliberate downward adjustment of a country's currency value against a foreign currency (or basket), typically by a central bank under a fixed/managed exchange rate regime. (Under floating regimes, the analogous market-driven fall is called DEPRECIATION.) Statement 1 is CORRECT. Devaluation IMPROVES THE COMPETITIVENESS of domestic EXPORTS. When the rupee is devalued against the dollar, Indian goods become cheaper for foreign buyers (in their currency terms), boosting export demand. Conversely, imports become more expensive in rupee terms. This is the textbook rationale for devaluation as an export-promotion tool. Statement 2 is WRONG. Devaluation REDUCES, not increases, the FOREIGN VALUE of the domestic currency. By definition, devaluation means each unit of domestic currency buys fewer units of foreign currency. The statement reverses the effect. Statement 3 is WRONG (or, more precisely, NOT NECESSARILY TRUE). The claim that devaluation 'necessarily' improves the trade balance is theoretically incorrect. The MARSHALL-LERNER CONDITION must hold: the sum of price elasticities of exports and imports must exceed 1 for devaluation to improve the trade balance. In the short run, the J-CURVE EFFECT shows that trade balance can actually WORSEN before improving (because contracted import quantities adjust slowly while paying more per unit). So devaluation does NOT 'necessarily' improve trade balance — it CAN, under favourable elasticities and over time. The keyword 'necessarily' in the stem is what eliminates statement 3 — UPSC tests precision. Source: NCERT Class 12 Macroeconomics Chapter on Open Economy Macroeconomics.