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Policies to correct balance of payments disequilibrium

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Presentation on theme: "Policies to correct balance of payments disequilibrium"— Presentation transcript:

1 Policies to correct balance of payments disequilibrium

2 Balance of Payments Disequilibrium
= current account deficit = value of imports > value of exports  net outflow from circular flow of income

3 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

4 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

5 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

6 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:

7 Protectionism 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

8 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

9 Reducing Inflation How? DOMESTIC INTERNATIONAL
Controlling excess demand (Demand pull) Control of costs (Cost push) DOMESTIC Cheap domestic goods Reduce imports INTERNATIONAL Increase foreign demand for our export

10 Currency Control How? Advantage Disadvantage
Restrict amount of currency leaving the country Advantage Have control over supply of currency Reduce fluctuation of exchange rate Disadvantage Ineffective for government

11 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

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