Correct Option: D. Imports that can be bought with the naira have become costlier
Explanation of the Correct Answer:
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Understanding Devaluation: Devaluation refers to a reduction in the value of a currency relative to other currencies. When a currency is devalued, it means that it takes more of that currency to purchase the same amount of foreign currency. For example, if the Naira is devalued, it will take more Naira to buy the same amount of dollars or euros.
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Impact on Imports: When the Naira is devalued, the cost of importing goods increases. This is because importers need to convert more Naira to acquire the same amount of foreign currency needed to pay for imported goods. For instance, if a product costs $100 and the exchange rate before devaluation was 200 Naira to 1 dollar, the cost in Naira would be 20,000 Naira. If the Naira is devalued to 300 Naira to 1 dollar, the same product would now cost 30,000 Naira. Thus, imports become costlier.
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Economic Implications: This increase in import costs can lead to higher prices for consumers in Nigeria, as businesses may pass on the increased costs to customers. It can also affect the overall economy by reducing the purchasing power of consumers and potentially leading to inflation.
Why the Other Options are Incorrect:
- Option A: Goods that can be imported with the Naira have become cheaper
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Explanation: This statement is incorrect because devaluation makes imports more expensive, not cheaper. As explained, the cost of foreign goods rises when the Naira loses value.
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Option B: Value of other currencies relative to the Naira have become cheaper
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Explanation: This option is misleading. When the Naira is devalued, it means that the value of the Naira has decreased compared to other currencies, not that those currencies have become cheaper. In fact, it takes more Naira to buy the same amount of foreign currency.
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Option C: Goods that can be exported from Nigeria have become costlier
- Explanation: This statement is also incorrect. When the Naira is devalued, Nigerian goods become cheaper for foreign buyers because they can purchase more with their stronger currency. This can potentially increase exports, not make them costlier.
Summary of Key Points:
- Devaluation: A decrease in the value of a currency relative to others, leading to increased costs for imports.
- Impact on Imports: Devaluation results in higher prices for imported goods, as more local currency is needed to purchase foreign currency.
- Consumer Effects: Higher import costs can lead to inflation and reduced purchasing power for consumers.
- Export Dynamics: Devaluation can make exports cheaper for foreign buyers, potentially boosting export sales.
This understanding of currency devaluation and its effects is crucial for grasping broader economic concepts in commerce.