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Policies To Correct Balance of Payments Disequilibrium
Policies To Correct Balance of Payments Disequilibrium
Policies To Correct Balance of Payments Disequilibrium
balance of payments
disequilibrium
IMPORT
S
EXPORT
S
Balance of Payments
Disequilibrium
= current account deficit = value of
imports > value of exports net
outflow from circular flow of income
Negative Effects
Net outflow from circular flow of
income net fall in AD inward
shift of AD
Exporting firms require less labour +
domestic businesses lose market
share to imports unemployment
reduce in economys productive
capacity
Fall in business confidence and
investment by exporting firms
Expenditure switching
policies
Policies that aim to reduce AD to
encourage less expenditure on
imports, and more on domestic
goods and export production.
to improve the Current Balance
Currency
Devaluation/Depreciation
EXPORTS: prices (in foreign currency)
fall volumes rise total value of
exports (in own currency) rises
IMPORTS: prices (in own currency) rise
volumes fall total value of imports
(in foreign currency) falls
= improvement in Balance of
Payments (current account)
= worsening in Terms of Trades
Problems with
Devaluation
Current account may worsen before
it improves demand for both
exports and imports tends to be
inelastic in the short term = the J
CURVE:
Protectionism
Tariffs = tax on imports prices rise
Quotas = limit on quantity of imports
Embargoes = total ban on all imports
Voluntary export agreements = selfimposed quota
Government purchasing = contract
given to domestic rather than foreign
firm
Red tape = impose regulations on
imports
Reducing Inflation
How?
DOMESTIC
INTERNATIONAL
Currency Control
How?
Restrict amount of currency leaving the country
Advantage
Disadvantage