This would built a favourable atmosphere in the balance of payment position. Protectionism may lead to retaliation — with other countries placing tariffs on our exports — so exports could decrease.
It depends on many other factors, for example, if the economy is growing strongly, a rise in interest rates may not actually reduce consumer spending — because income growth is high and confidence high. If India experiences an adverse balance of payments with regard to U. It means that the country produces those goods which it imports.
Generally the international monetary fund advocates the policy of devaluation as a corrective measure of disequilibrium for the countries facing adverse balance of payment position. Deflationary policies will also put pressure on manufacturers to reduce costs, and this will lead to more competitive exports, and so exports may increase in the long run because of this effect.
Devaluation may not be effective if the deficit arises due to cyclical or structural changes. When tariffs are imposed, the prices of imports would increase to the extent of tariff.
Therefore the improvement in the current account might only be temporary. In these ways, imports are reduced in order to correct an adverse balance of payments.
However, lower wages will also lead to lower aggregate demand and could lead to deflation and low growth. Exchange Control It is an extreme step taken by the monetary authority to enjoy complete control over the exchange dealings.
When demand for our export rises, more and more goods produced in a country would go for exports and thus creating shortage of such goods at the domestic level. Adjustment through Exchange Depreciation Price Effect: The balance of payments is said to be in equilibrium when the domestic interest rate equals the world rate.
Exports will become cheaper, and there will be an increase in the quantity of exports. The advantage of fiscal policy is that it would not have an adverse effect on the exchange rate. Thus demand for imports is reduced. A significant method which is quite often used to correct fundamental disequilibrium in balance of payments is the use of expenditure-switching policies.
Further, it is not easy to reduce substantially government expenditure and impose heavy taxes as they are likely to affect incentives to work and invest and invite public protest and opposition.
Fall in the value of a currency with respect to foreign currencies as determined by demand and supply conditions is described as depreciation. Quantitative changes in exports and imports require policy changes. Generally devaluation is resorted to where there is serious adverse balance of payment problem.
At the same time, the supply of foreign exchange is restricted only for essential goods. The government also can give subsidies to exporters. They can include a tightening of fiscal policy or monetary policy; this will reduce aggregate demand.
We thus see that correcting the balance of payments through contractionary fiscal policy is not an easy matter. A deficit in the balance of payments implies an excess of expenditure over income. It can decrease the cost to produce something goods.
Exchange depreciation will stimulate exports and reduce imports because exports will become cheaper and imports costlier. Quotas Under the quota system, the government may fix and permit the maximum quantity or value of a commodity to be imported during a given period. Due to non availability of capital goods in India, we have no option but to continue imports at higher costs.
For example by increasing the quality of the export goods, it can be done by carrying out research and development. The government also imposes exchange controls. Method 2 Expenditure-Reducing Policies:(b) Evaluate the policies by which a deficit in the current account of the balance of payments might be corrected.
[15 marks] Deficits in current accounts might be resolved either by expenditure switching, expenditure reducing or supply side policies. Explaining the effectiveness of different policies to reduce a current acc. deficit. Including - devaluation, deflationary policies, supply side policies.
Examples and graphs to. How to correct the Balance of Payment? Solution to correct balance of payment disequilibrium lies in earning more foreign exchange through additional exports or reducing imports. Quantitative changes in exports and imports require policy changes.
Both policies should, at the same time, reduce the current account deficit. Policies to improve competitiveness So, import controls are difficult to impose in today's world of free trade and the WTO. The value of the pound may. Government policies to reduce poverty or to encourage economic equality, if carried to extremes, can injure incentives for economic output.
The poverty trap, for example, defines a situation where guaranteeing a certain level of income can eliminate or reduce the incentive to work. The important way to reduce imports and thereby reduce deficit in balance of payments is to adopt monetary and fiscal policies that aim at reducing aggregate expenditure in the economy.
The fall in aggregate expenditure or aggregate demand in the economy works to reduce imports and help in solving the balance of payments problem.Download