Devaluation of currency will help to correct balance of payments deficit if a country's

Analyze the question: Devaluation is a deliberate lowering of a country's currency value against foreign currencies. The question asks under what condition it will correct a balance of payments (BOP) deficit.

Concept: The Marshall-Lerner condition

• After devaluation, exports become cheaper for foreigners, and imports become more expensive for residents.
• For the BOP to improve, the combined price elasticities of demand for exports and imports must be greater than 1.
• In practice, this means foreign demand for our exports must be elastic (responsive to price), so that the quantity of exports rises by more than the price falls, and export earnings increase.
• Demand for imports should also be elastic, so that import spending falls.

Step-by-step evaluation of the options:

• A. Exports have perfectly inelastic demand. Cheaper exports would not lead to any rise in quantity demanded, so export earnings would fall. This worsens the deficit. ✗
• B. Imports have inelastic demand. Residents keep buying the same quantity of imports, which are now more expensive in domestic currency. Import spending rises, so the deficit worsens. ✗
• C. Exports have elastic demand. A fall in export prices leads to a proportionally larger rise in quantity demanded. Export revenue rises and the deficit narrows. ✓
• D. Productivity is low. Low productivity means the country cannot increase output to supply more exports, so devaluation would not help. ✗

Answer: The correct option is C.

Tip: Remember "Devalue → Demand must be Dynamic (elastic)." If the question mentions devaluation working, look for elastic demand for exports (and imports). Any answer that says inelastic usually signals devaluation failing.