ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -A weak domestic currency makes a nation’s exports more competitive in global markets, and simultaneously makes imports more expensive. Higher export volumes spur economic growth, while pricey imports also have a similar effect because consumers opt for local alternatives to imported products.

Detailed explanation-2: -The currency of a nation is said to be undervalued when its value in foreign exchange is low. A cheaper (undervalued) currency renders the nation’s goods (exports) more affordable in the global market while making imports more expensive.

Detailed explanation-3: -In general, a weaker currency makes imports more expensive, while stimulating exports by making them cheaper for overseas customers to buy. A weak or strong currency can contribute to a nation’s trade deficit or trade surplus over time.

Detailed explanation-4: -Yes, devaluation helps in boosting exports because the goods become relatively cheaper for foreign consumers as the value of domestic currency goes down when compared to foreign currency. Devaluation helps in reducing the trade deficit.

Detailed explanation-5: -As exports begin to increase due to cheaper prices and imports decrease due to perceived higher prices from domestic consumers, it ultimately decreases trade deficits. Therefore, the devaluation of domestic currency can reduce deficits through strong demand for less costly exports and more costly imports.