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

Devaluation reduces the value of a domestic currency relative to foreign currencies, making domestic goods cheaper for foreign buyers and thus inherently improving the competitiveness of exports (Statement 1). Statement 3 is incorrect because devaluation does not *necessarily* improve the trade balance; this outcome depends on the Marshall-Lerner condition, which requires the sum of price elasticities of demand for exports and imports to be greater than one. The core concept tested is the impact of exchange rate adjustments on international trade and the specific conditions required for a favorable trade balance.