Detailed Explanation:

Answer: Option 1 — 1 Only

Currency devaluation makes domestic goods cheaper for foreign buyers, thereby improving export competitiveness in international markets. However, it decreases (not increases) the foreign value of domestic currency and does not necessarily improve the trade balance as outcomes depend on various other factors like import dependency and global demand elasticity.

✅ Statement 1 – Correct: Devaluation reduces the price of exports in foreign currency terms, making domestic goods more competitive in foreign markets and potentially increasing export demand.

❌ Statement 2 – Incorrect: Devaluation decreases the foreign value of domestic currency, not increases it—this is the fundamental mechanism of devaluation where domestic currency becomes cheaper relative to foreign currencies.

❌ Statement 3 – Incorrect: While devaluation can improve trade balance by boosting exports, it's not guaranteed as it may also increase import costs (especially for import-dependent economies), lead to inflation, and the final impact depends on price elasticity of demand for exports and imports (Marshall-Lerner condition).

📝 Short Notes: Currency Devaluation

• Definition: Deliberate downward adjustment of a currency's value relative to foreign currencies by the government or monetary authority under a fixed/semi-fixed exchange rate regime.
• Immediate Effects: Exports become cheaper in foreign markets; imports become more expensive in domestic terms; foreign currency reserves become more valuable in domestic currency.
• Export Competitiveness: Domestic products gain price advantage in international markets, potentially increasing export volumes if demand is price-elastic.
• Marshall-Lerner Condition: Trade balance improves only if sum of price elasticities of demand for exports and imports is greater than 1; otherwise, trade deficit may worsen.
• J-Curve Effect: Initially trade balance may worsen (due to existing contracts and time lags), then improve over medium to long term as export volumes respond to price changes.
• Risks: Imported inflation (especially for raw materials and energy), potential competitive devaluations by trading partners, reduced purchasing power for foreign goods and services.