Question

Distinguish between expenditure-reducing and expenditure-switching policies to correct the balance of payments disequilibrium

Answer 1

Both the polices are used to correct disequilibrium in BOP

Expenditure Switching Policies:

Relative prices of imports and exports are changed through these policies. A currency depreciaiton is a expenditure switching policy as it makes the exports more cheaper and imports expensive.

Import tariff is one more example where the prices of imports are increased. Import quota is one example of protectionist measure.

Expenditure Reducing Policies:

The goal is to reduce the demand for exports. Such policies include lowering or real income and aggregate demand through imposition of higher taxes.

Government can reduce its spending in order to reduce the domestic aggregate demand in the economy.

So, Contractionary Fiscal And Monetary Policy are two main polices under this category.

Interest rates are increased through lowering the money supply into the economy which discourages the investment by investors.

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