Consider the following statements : The effect of devaluation of a currency is that it necessarily 1. improves the competitiveness of the domestic exports in the foreign markets 2. increases the foreign value of domestic currency 3. improves the trade balance Which of the above statements is/are correct?

Devaluation of a currency means a deliberate reduction in the value of a country's currency relative to other currencies, typically in a fixed exchange rate system, or a sharp fall in value in a flexible system.

Statement 1: Improves the competitiveness of the domestic exports in the foreign markets. When a currency devalues, domestic goods and services become cheaper for foreign buyers in terms of their own currency. This makes exports more price-competitive in international markets. This statement is correct.

Statement 2: Increases the foreign value of domestic currency. Devaluation, by definition, means the domestic currency has become less valuable relative to foreign currencies. Therefore, its foreign value decreases, not increases. This statement is incorrect.

Statement 3: Improves the trade balance. While a devaluation can make exports cheaper and imports more expensive, potentially leading to an improvement in the trade balance (current account), this is not 'necessarily' true. The improvement depends on the elasticity of demand for exports and imports (Marshall-Lerner condition). In the short run, due to existing contracts and slow adjustment, the trade balance might even worsen before improving (the J-curve effect). Because of the word 'necessarily', this statement is incorrect.

Therefore, only statement 1 is correct.