What effect does depreciation of domestic currency have on foreign trade?

It encourages export of the domestic country

The correct answer is Option 3: It encourages export of the domestic country

• Depreciation of domestic currency means that the value of the domestic currency falls relative to foreign currencies.
• As a result:
  • Exports become cheaper for foreign buyers because they need to spend less of their currency to buy domestic goods.
  • Imports become more expensive for domestic consumers because they need to spend more domestic currency to buy foreign goods.
• This leads to an increase in exports and a decrease in imports, benefiting domestic producers who sell goods abroad.