SSC CGL 2023 PYQ — Question 32

The correct answer is option 3 i.e. greater than unity.

• Devaluation can improve a country's balance of payments (BOP) when the sum of the elasticities of demand for exports and imports is greater than unity. This concept is grounded in the Marshall-Lerner Condition, which explains how changes in exchange rates can impact a country’s trade balance. Let’s break down the explanation:
• Balance of Payments (BOP):
• The BOP is a record of all economic transactions between residents of a country and the rest of the world, including the trade balance (exports and imports), investment income, and capital flows.
• Devaluation refers to the reduction in the value of a country's currency relative to other currencies. This makes a country's exports cheaper and imports more expensive.
• Elasticity of Demand:
• Price Elasticity of Demand (PED) measures how sensitive the quantity demanded of a good is to changes in its price.
• Export Demand Elasticity: This measures how responsive the demand for a country's exports is to changes in the price of those exports (which is affected by devaluation).
• Import Demand Elasticity: This measures how responsive the demand for imports is to changes in the price of those imports (which also changes due to devaluation).