UPSC Prelims 2021 · Question 8 of 97
UPSC Prelims 2021 question on Devaluation Effects
- ExamUPSC CSE
- Year2021
- PaperGeneral Studies Paper I
- SubjectIndian Economy
- TopicExternal Sector of India
- DifficultyMedium
- TypeStatement
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?
Show answer
Answer: A. 1 only
Verdict
Correct statements: 1 only → Option (a).
Analysis
Devaluation means official lowering of the value of a country's currency within a fixed (or managed floating) exchange rate system.
Statement by statement
Statement 1 — CORRECT: After devaluation, domestic goods become cheaper in foreign markets. For example, if a shirt costing $8 in the US and Rs 400 in India would not sell at an over-valued rupee, devaluation makes Indian shirts cheaper for foreign buyers. Hence devaluation improves competitiveness of domestic exports.
Statement 2 — INCORRECT: Devaluation lowers, not raises, the foreign value of domestic currency. If $1 was Rs 10 (1 Re = $0.1) and becomes $1 = Rs 20 (1 Re = $0.05), the foreign value of the rupee has fallen.
Statement 3 — INCORRECT: Trade balance depends on both exports and imports. Devaluation may improve exports but also makes imports costlier. For an economy heavily dependent on imports (e.g., crude oil for India), the import bill may rise more than the export gain, worsening trade balance. So devaluation does NOT 'necessarily' improve trade balance.