International TradePYQ - Nov 2020 (Inter)Question 165 of 20

Devaluation of currency encourages:

Options

AImports

BExports

CSavings

DInvestment

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Correct Answer

✅ Option b — Exports

All Options:

AImports
BExports
CSavings
DInvestment

Detailed Solution & Explanation

To understand the effect of devaluation of currency, let's break it down into steps: • Devaluation of currency means the value of a country's currency is reduced in relation to other currencies. • This reduction in value makes the country's exports cheaper for foreign buyers, as they can now buy more of the country's goods with the same amount of their currency. • As a result, the demand for the country's exports increases, leading to an increase in the quantity of exports. • This is because the law of demand states that as the price of a good decreases, the quantity demanded of that good increases, ceteris paribus. The correct answer is right because devaluation makes exports more competitive in the global market, thereby encouraging exports. On the other hand, options like imports are incorrect because devaluation makes imports more expensive, discouraging their purchase.

About This Chapter: International Trade

Paper

Paper 4: Business Economics

Weightage

10%

Key Topics

Theories, Trade Policy, Exchange Rates

This chapter explores trade between nations — why countries trade, the theories of Absolute and Comparative Advantage, Balance of Payments, Exchange Rate systems (Fixed vs Flexible), and India's trade policy including tariffs, quotas, and WTO rules.

View Official ICAI Syllabus

Exam Strategy Tip

Understand Comparative Advantage theory thoroughly — it's the foundation of international trade. Also focus on the Balance of Payments structure and what causes deficits.

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