Question : The country can improve its balance of payments by devaluation when the sum of elasticity of demand for exports and imports is _____________.
Option 1: less than unity
Option 2: equal to unity
Option 3: greater than unity
Option 4: zero
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Correct Answer: greater than unity
Solution : The correct option is greater than unity.
If the sum of the elasticity of demand for exports and imports is greater than unity (greater than 1 in absolute value), it implies that the overall responsiveness of both export and import quantities to changes in price is significant. In this situation, devaluation can potentially lead to an improvement in the balance of payments.
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