Transcript Policies to correct balance of payments disequilibrium

Policies to correct balance of
payments disequilibrium
EXPORTS
IMPORTS
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 economy’s
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
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Tariffs = tax on imports  prices rise
Quotas = limit on quantity of imports
Embargoes = total ban on all imports
Voluntary export agreements = self-imposed
quota
• Government purchasing = contract given to
domestic rather than foreign firm
• Red tape = impose regulations on imports
Tariffs and quotas
• Can lead to a loss of consumer welfare and
retaliation of trading partners imposing their
own tariffs
• WTO  aims to reduce international trade
barriers and encourage free trade
• Trading bloc  an agreement between a
group of countries to reduce or eliminate
internal trade barriers
Reducing Inflation
How?
• Controlling excess demand (Demand pull)
• Control of costs (Cost push)
DOMESTIC
• Cheap domestic goods
• Reduce imports
INTERNATIONAL
• Increase foreign demand for our export
Currency Control
How?
Restrict amount of currency leaving the country
Advantage
• Have control over supply of currency
• Reduce fluctuation of exchange rate
Disadvantage
• Ineffective for government
Supply Side Policies
Aim
Increasing the competitiveness of the country in the global market
How
• Provide training and education
• Increase efficiency of productivity of country
• Increase productivity
• More exports
BUT
Take long time to move from deficit to surplus