UPSC Prelims 2021 · GS Paper I
Question 8: Economy and Social Development
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?
AnswerUPSC’s answer is (a).
Devaluation lowers the foreign-currency price of a country's exports, so they become more competitive abroad. It does not raise the currency's foreign value; it lowers it. The trade balance improves only if export and import demand respond strongly enough (the Marshall-Lerner condition), and even then often with a lag (the J-curve), so improvement is not certain. Remember: devaluation means cheaper exports and costlier imports, but the effect on the trade balance depends on elasticities.
- 1. Cheaper exports in foreign currency improve competitiveness.
- 2. Devaluation reduces, not increases, the foreign value of the domestic currency.
- 3. The trade balance improves only under favourable elasticities, so it is not a necessary effect.
How you could have got this
- If you were sure statement 1 is correct, (c) and (d) go: each of them leaves 1 out.
What you needed to know: Cheaper exports in foreign currency improve competitiveness.
- Then, if you were sure statement 2 is not correct, (b) goes: it includes 2.
What you needed to know: Devaluation reduces, not increases, the foreign value of the domestic currency.
Only (a) is left. You didn’t need statement 3.
Which options go is worked out from UPSC’s key and the options, not by a model.
Why each option is right or wrong
- (a) Right: only statement 1 holds necessarily.
- (b) Wrong: statement 2 is false because devaluation lowers the foreign value of the domestic currency.
- (c) Wrong: statement 3 is not necessary, since the result depends on elasticities.
- (d) Wrong: both statements 2 and 3 fail.
Answer: UPSC’s key. Explanation: written by UPSC Grade, not by UPSC.
Source: UPSC, Civil Services (Preliminary) Examination 2021, General Studies Paper I, Series A. The paper on upsc.gov.in.