Policies to correct BOP

● assessment of the effectiveness of fiscal, monetary and supply side policies to correct a
balance of payments disequilibrium
● expenditure-reducing and expenditure-switching policies
 Policies to correct BOP Deficit
1. Use Contractionary fiscal policy by
- Increasing income tax
- Reducing current public expenditure on pensions, unemployment benefits,
wages and salaries
so as to reduce demand of imports in the economy

Eval:
- this may reduce domestic consumption too, thus affecting domestic firms
and economic growth as well
- This may lead to higher welfare loss for people who are dependent on
welfare payments (old age and poor)
- This is applicable to economies with high mpm
2. Use Contractionary monetary policy by
- Raising interest rates to discourage firms for borrowing that may help to
reduce demand for imports (raw material)

- Raising CRR and/or SLR to restrict the availability of credit to firms and
households such that they are unable to purchase imports

- OMO in which govt sells securities and sucks money out of the economy
such that commercial banks have less available funds to lend out to firms
and households as loans.
Eval:
- Economy might go into recession if firms are unable to invest and borrow for
their survival. Cash crunch may thus lead to loss of jobs and decrease in
living standards
3. Use Protectionist policies
- Subsidize Xs to make them cheap
- Introduce tariffs to make Ms expensive
- Introduce NTBs to reduce imports
Eval: disadvantages of protectionism

4. Use Supply Side policies

- privatisation and deregulation may help to increase the efficiency of the
economy because of the profit motive in the private sector. This increased
efficiency would translate into lower costs of production and more exports.
Eval:
- High unemployment in SR
- If government is unable to privatise or deregulate properly, private
monopolies might be formed that can exploit consumers
 Policies to correct BOP Surplus
1. Use Expansionary fiscal policy by
- Decreasing income tax
- Increasing current public expenditure on pensions, unemployment benefits,
wages and salaries
so as to increase demand of imports in the economy

Eval:
- this may increase domestic consumption too, thus leading to high Demand
Pull Inflation
- This may lead to higher budget deficit of the govt and thus increased
national debt which would require a higher tax in future creating
inter-generational inequality.
- This is applicable to economies with high mpm
2. Use Expansionary monetary policy by
- Decreasing interest rates to encourage firms for borrowing that may
motivate firms to expand and grow for which they would need to import
greater quantity of raw material

- Reducing CRR and/or SLR to increase the availability of credit to firms and
households such that they are able to purchase imported goods & services
such as cars, holidays etc.

- OMO in which govt purchases securities and pumps money into the
economy such that commercial banks have more funds to lend out to firms
and households as loans.
Eval:
- Economy might face very high inflationary pressure
3. Use free trade policies by removing tariff and NTBs such that firms and
households can freely import goods and services

Eval: disadvantages of free trade

Expenditure reducing and Expenditure switching policies
Policies to reduce a current account could also be classified into two types:

1. Expenditure switching policies

This shifting the consumer expenditure from imports to domestic goods by
CHANGING THEIR PRICES through
- Increased tariffs on Ms to make imported goods more expensive
- Subsidising domestic firms to make domestic goods cheaper
- Devaluation of currency that makes Xs cheap
- Non tariff barriers that reduce ss of imported foods and thus increase their price.
Eg- Quota, Quality control regulations etc.

2. Expenditure reducing policies: These are policies to reduce overall spending on

imports and REDUCING AD by using
- tight fiscal policy- increase Y tax
- tight monetary policy- increase roi