Q. Analyze the following statements in context with devaluation of currency:

1. The devaluation of currency always leads to greater export prospects
2. Devaluation of currency leads to improvement of Balance of Trade almost immediately

Which among the above statements is/ are correct?
Answer: Neither 1 nor 2
Notes: The first statement is not always correct. Devaluation will not succeed in increasing export and decreasing import, if the domestic prices rise by the rate equal to or higher to the rate of devaluation. Devaluation should not be treated in isolation. A number of measures related to other spheres should also to be taken simultaneously. The credit and monetary policy must be streamlined otherwise the inflationary tendencies may affect the internal market. Devaluation is not likely to produce favorable effects if other countries retaliate by devaluating their currency. Thus, cooperation of other countries is necessary to make devaluation a success. According to Marshall, condition (of BOP) says that development will improve the BOP only if the sum of elasticity of demand for the country’s exports increases. According to J Curve, devaluation will result in an initial deterioration of the terms of trade, because the import will immediately be costlier and export will take some time to improve during this period.

This question is part of UPSC Daily 20 MCQ Series Course on GKToday Android app.