Consider the following statements: The effect of devaluation of a currency is that it necessarily<br/>1. improves the competitiveness of the domestic exports in the foreign markets.<br/>2. increases the foreign value of domestic currency.<br/>3. improves the trade balance.<br/><br/>Which of the above statements is/are correct?

1. Correct. Devaluation makes domestic currency cheaper relative to foreign currencies, so domestic exports become cheaper in world markets and generally more competitive.

2. Incorrect. Devaluation reduces the foreign value of the domestic currency; one unit of domestic currency buys less foreign currency.

3. Incorrect. Devaluation does not necessarily improve the trade balance; it depends on export-import elasticities and may even worsen it initially (J-curve effect).

Hence, only statement 1 is correct.