Question

Briefly explain the four approaches used to correct disequilibrium in the balance of payments with the aid of automatic stabilisers.

Answer 1

Answer : Disequiliburm of balance of payment means negative balance has been arrived it means that import has been exceed the import of an country during particular financial year. The deficit of balance of payment shows that it weak the economy of a country at large phase.

Four main approach are :

• To make corrections in the Balance of trade - Balance of payment has adverse affect with the exceeding import and decreasing export. To make corrections in balance of payment there should be increase in export . Import should be discouraged and charged higher tax rates.
• Deflation - Deflation is the correct measures as there is decrease in the quantity of money in order to make reducation in price and income of the consumer. Deflation help in decreasing income or wages.
• Deperication - Deperication means fall in the rate of exchange of currency (Home currency) in terms of another (Forgien currency). It has been applied to where there is flexiable exchange rate system where import and export are elastic.
• Devaluation - Devaluation means decrease in the value of currency. Devaluation is arbitray in nature which means decrease in the reduction in balance of payment deficit. Export of the country should not more traditional as compared to import.
• Exchange control - Exchange control means to control over the use of forgien exchange by centeral bank. It is direct method to control import. It deals with the method to elminate disequiliburm for short time duration.

These are four main approach which used to remove disequiliburm balance of payment.