How can currency depreciation stimulate an increase in net exports ? 1. By reducing export costs 2. By reducing import prices Select the answer using the code given below :

Currency depreciation occurs when the value of a domestic currency falls relative to foreign currencies. This process stimulates net exports primarily by making domestic goods cheaper for foreign buyers in terms of their own currency, thereby increasing export competitiveness [1]. Standard economic models and the Marshall-Lerner condition confirm that depreciation reduces the foreign-currency price of exports, which typically leads to an increase in export volume [4]. Conversely, depreciation makes imports more expensive for domestic consumers because more units of the local currency are required to purchase the same amount of foreign goods [1]. Therefore, while depreciation reduces the relative cost of exports for foreigners (Statement 1), it increases import prices rather than reducing them (Statement 2). Consequently, only the first statement is a valid mechanism for stimulating net exports through depreciation.

Sources

1. [1] Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 17: India’s Foreign Exchange and Foreign Trade > WHICH EXCHANGE RATE SYSTEM SUITS AN ECONOMY BEST? > p. 495
2. [4] https://en.wikipedia.org/wiki/Marshall%E2%80%93Lerner_condition