Currency Devaluation Improves Trade Competitiveness

Steps:

• Devaluation lowers the currency's value, making exports cheaper for foreign buyers and imports more expensive domestically.
• This shifts demand toward domestic goods, boosting exports and curbing imports.
• The net effect reduces the current account deficit if export revenues rise more than import costs.
• Competitive pricing is the primary mechanism driving this adjustment in international trade.

Why A is correct:

• Devaluation directly enhances export competitiveness by reducing prices in foreign markets, increasing net exports per the balance of payments identity (current account = exports - imports).

Why the others are wrong:

• B: Capital/financial surpluses offset overall BOP imbalances but do not address current account deficits directly.
• C: Elasticities >1 (Marshall-Lerner condition) ensure devaluation works but is a prerequisite, not the core reason for choosing it.
• D: High barriers (e.g., tariffs) hinder trade flows and reduce devaluation's effectiveness, providing no incentive to devalue.

Final answer: A