Question

International Economics

Explain how to manage/overcome balance of payments deficit of a country. Give explaination for each method. Put in-text-citations if you have any to support your point.

Answer 1

Answer-Measures to Correct Disequilibrium in the Balance of Payment are:-

• Depreciation-It means rise in the price of foreign currency or fall in the price of domestic currency.This makes imports expensive and imports more profitable.
• Devaluation-It means increase in the price of foreign currency and fall in the value of domestic currency in fixed exchange rate.
• Import Control-The imports may be kept under control by fixing quotas and by imposing import duties or tariffs.This will reduce the import and thus while the deficit in Balance of Payment.
• Export promotion-The government may take various steps to promote exports it may reduce export duties,give cash assitance to exporters.It may arrange exhibition and may exempt exporter goods from taxes.It may provide raw-material to export industries and may also provide tourism to attract foreign tourists.
• Exchange control-The government can hold complete control over foreign exchange by asking the exporters to sell entire foreign exchange to the central bank and ask all the importers to buy foreign exchange from central bank.
• Production of Import substitutes-It will lead to replacement of imported goods by these goods,if these industries expand more,their may also end up earning export owners.
• Monetary policy-The central bank can reduce the volume of credit by increasing the bank rate and increase in interest rate leads to decrease in credit and therefore consumers and producers borrow less.These leads to fall in Imports.

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