Question

State two measures to correct disequilibrium in the balance of payments.

Suggest measures to correct disequilibrium in the balance of payments.

Explain any four methods of correcting disequilibrium in the balance of payments of a country.

Explain four measures to correct disequilibrium in the balance of payment.

State any two measures to correct disequilibrium (deficit) in the balance of payments.

Answer 1

1. Devaluation: To eliminate a deficit in the balance of payments, a nation can discount its currency relative to other currencies. As a result, exports are less expensive abroad while imports are more costly for home consumers. Deducting will undoubtedly result in a decrease in imports and an increase in exports if demand and supply elasticities are relatively strong. This will eliminate or reduce the balance of payments deficit.
2. Import Control: A wide range of import control measures, including tariffs and quotas, can be implemented to limit imports. Quotas use quantitative limits to control the amount of imports. For instance, the government may determine that this year’s imports can only account for 90% of last year’s import volume. Additionally, the government may raise import taxes or levies. As a result, imports will decline and the cost of imported items will increase. Consequently, the deficit in the balance of payments is decreased.
3. Export Promotion: To encourage exports, the government may implement a number of export promotion initiatives. To start, it might lower export taxes to promote exports. Second, to encourage exports, exporters can receive financial aid and subsidies. Thirdly, exports can be promoted by offering a variety of amenities such as quality control, market intelligence, and the organization of exportable goods shows abroad. Fourth, as a way to encourage exporters, commodities intended for export may be free from a number of levies. Fifth, in order to lower production costs and make exports competitive in the global market, export-oriented industries might be supported by offering tax breaks, funding, raw materials, etc. Sixth, in order to generate a significant amount of foreign cash, efforts should also be made to promote tourism by drawing in international visitors.
4. Exchange Control: Exchange control, often known as exchange limitations, is another crucial strategy for resolving imbalances in the balance of payments. By ordering exporters to sell their foreign exchange profits to the central bank and all importers to purchase foreign exchange from the central bank, the government may attempt to exert total control over all foreign exchange transactions. Only license holders for specific commodities are allowed to import foreign exchange, which is rationed out among them. Exchange regulations prevent market forces from operating freely. They effectively give the government authority over how foreign exchange is distributed.
5. Production of Import Substitutes: It is possible to take action to promote the manufacturing of import alternatives. In the short term, this will save foreign exchange by substituting imports with their alternatives. The industries that produce import alternatives may also become exporters if they grow as a result of the numerous incentives offered to them.