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CA Foundation · Business Economics · International Trade

Which of the following is most likely to occur if the rupee depreciates significantly against other currencies, other things remaining equal?

Depreciation of the rupee makes Indian exports cheaper in foreign currency, encouraging foreign demand, and makes imports costlier in rupees, discouraging them. Both effects tend to improve the trade balance. The other options describe the effects of rupee appreciation instead.

  1. AExports become cheaper for foreign buyers, tending to improve the trade balanceCorrect
  2. BImports become cheaper for Indian buyers, tending to widen the trade deficit
  3. CExports become costlier for foreign buyers, tending to reduce exports
  4. DForeign tourists find India costlier, reducing tourism receipts

Explanation

Depreciation lowers the foreign-currency price of Indian goods, making exports more competitive, while raising the rupee price of imports. Together these tend to improve the trade balance. The other options describe the effects of appreciation, not depreciation.

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