How can currency depreciation stimulate an increase in net exports?

Select the answer using the code given below:

(a) 1 only

(b) 2 only

(c) Both 1 and 2

(d) Neither 1 nor 2

Answer: (a) 1 only

Explanation:

Currency depreciation occurs when a country’s domestic currency loses value relative to foreign currencies. This change affects international trade by making domestic goods cheaper for foreigners and foreign goods more expensive for domestic consumers, thereby influencing net exports.

1. Reducing Export Costs:
When the domestic currency depreciates, foreign buyers can purchase more goods for the same amount of their currency. This effectively lowers the price of exports in foreign markets, enhancing the country’s international competitiveness and often increasing export volume.

2. Effect on Net Exports:
Net exports are calculated as Exports − Imports. Depreciation tends to raise export demand while reducing import demand, since imported goods become more expensive for domestic consumers. This combination usually leads to a rise in net exports, supporting economic growth.

Answer: (a) 1 only