Devaluation of currency may not correct a balance of payments deficit if the demand for export is

Step 1: Analyze the question Devaluation is a deliberate lowering of a country's currency value against foreign currencies. It is meant to make exports cheaper for foreigners and imports more expensive at home. The question asks when this policy may fail to correct a balance of payments (BOP) deficit, and the answer depends on the price elasticity of demand for exports.

Step 2: Concept (Marshall-Lerner condition) Devaluation improves the BOP only if the sum of the elasticities of demand for exports and imports is greater than 1. If foreign demand for exports is very unresponsive to price changes, the policy fails.

Step 3: Test each option

• A. Perfectly inelastic (Ed = 0): After devaluation, exports become cheaper abroad, but foreign buyers do not buy any more. The quantity exported stays the same while the price (in foreign currency) falls, so export earnings fall. Imports cost more, so the import bill rises or stays the same. The deficit may worsen. Devaluation fails here.
• B. Perfectly elastic: A small price fall causes a huge rise in quantity demanded. Export earnings rise sharply, so devaluation works very well.
• C. Fairly elastic (Ed > 1): Quantity rises by a larger proportion than the price falls, so export revenue increases. Devaluation works.
• D. Unitary elastic (Ed = 1): Export revenue stays the same. This is a borderline case, and the overall effect depends on import elasticity. It is less clear-cut than A. In the case of A, the failure is certain.

Step 4: Answer Devaluation is least likely to correct a deficit when foreign demand for exports is perfectly inelastic.

This is a common problem for primary-product exporters like Nigeria (crude oil, cocoa), where foreign demand does not respond much to price changes.

Exam tip: Remember "Devalue → need elastic demand." If the question asks when devaluation fails, look for inelastic. If it asks when it succeeds, look for elastic (Marshall-Lerner: sum of elasticities > 1).