The country can improve its balance of payments by devaluation when the sum of elasticity of demand for exports and imports is ______.

Question

Question

This question was previously asked in

SSC CGL 2023 Tier-I Official Paper (Held On: 25 Jul 2023 Shift 1)

Answer 1

The correct answer is greater than unity.Key Points

Devaluation is the reduction in the value of a country's currency relative to other currencies.
The elasticity of demand refers to the responsiveness of demand for a good or service to a change in its price.
When the sum of elasticity of demand for exports and imports is greater than unity, a devaluation can improve the balance of payments.
This is because a devaluation makes exports cheaper and imports more expensive, which can increase the demand for exports and reduce the demand for imports, thereby improving the balance of payments.
When the sum of elasticity of demand for exports and imports is less than unity or equal to unity, devaluation may not be effective in improving the balance of payments.

Additional Information

If the sum of elasticity of demand for exports and imports is less than unity, devaluation may not lead to a significant increase in demand for exports or decrease in demand for imports.
If the sum of elasticity of demand for exports and imports is equal to unity, devaluation may lead to a proportionate increase in demand for exports and decrease in demand for imports, but may not necessarily improve the balance of payments.
If the sum of elasticity of demand for exports and imports is zero, devaluation will not have any effect on the demand for exports or imports, and hence will not improve the balance of payments.