- Meaning: Foreign trade policy deals with exports and imports to manage the balance of trade of a country.
- Deficient demand: During deficient demand, exports should be increased as exports raise aggregate demand like investment.
- Excess demand: During excess demand and inflation, imports should be increased to raise supply and control prices.
- Balance of trade: Export surplus helps economic growth, while import surplus helps in controlling inflation.
Definitions [2]
Definitions: Fiscal Policy
- "Fiscal Policy is the policy concerning the revenue, expenditure and debt of the government for achieving definite objectives." -Prof. Dalton
- "Fiscal policy involves alterations in government expenditures for goods and services or the level of tax rates. Unlike monetary policy, these measures involve direct government entrance into the market for goods and services (in case of expenditure) and a direct impact on private demand (in the case of taxes)." – Prof. Gardner Ackley
- "We define fiscal policy to include any design to change the price level, composition or timing of government expenditure or to vary the burden, structure or frequency of tax payment." – G.K. Shaw
- Fiscal policy includes those "Changes in government expenditure and taxation designed to influence the pattern and level of activity." – Harvey and Johnson
- Fiscal Policy includes those "Changes in taxes and expenditure which aim at short run goals of full employment, price level and stability." – Otto Eckstein
Definition: Monetary Policy
“The management of the expansion and contraction of the volume of money in circulation for the explicit purpose of attaining a specific objective such as full employment.” — R.P. Kent
“Monetary Policy consists of the steps taken or efforts made to reduce to a minimum the disadvantages that flow from the existence and operation of the monetary resources in the economy to attain certain specific objectives….” — Prof. Crowther
“Monetary policy involves the influence on the level and composition of aggregate demand by the manipulation of interest rates and the availability of credit.” — D.C. Aston
“By monetary policy, we mean any conscious action undertaken by the monetary authorities to change the quantity, availability and cost of money.” — G.K. Show
Key Points
Key Points: Fiscal Policy and Deflationary Gap
- Reduce taxes to increase disposable income of households and spending by firms, which raises aggregate demand.
- Increase public expenditure on public works, welfare, health, education, and subsidies to boost demand and employment.
- Increase deficit financing to inject more purchasing power into the economy during deficient demand.
- Reduce public borrowing so that people retain more money for consumption and investment.
Key Points: Fiscal Policy and Inflationary Gap
- Increase taxes to reduce people’s disposable income and purchasing power, thereby lowering aggregate demand.
- Reduce public expenditure on public works, subsidies, and non-essential spending to control excess demand.
- Reduce deficit financing to prevent further increase in money supply and inflation.
- Increase public borrowing to absorb excess purchasing power from the economy.
Key Points: Instruments of Monetary Policy
- Quantitative (General) instruments: Bank rate, open market operations, cash reserve ratio (CRR) and liquidity ratio are used to control overall credit and money supply.
- Qualitative (Selective) instruments: Margin requirements, regulation of consumer credit, credit rationing, direct action, moral persuasion and publicity control specific uses of credit.
- To correct deflationary gap: Cheap money policy is used (low bank rate, purchase of securities, lower CRR, easy credit).
- To correct inflationary gap: Dear money policy is used (high bank rate, sale of securities, higher CRR, restricted credit).
Key Points: Objectives of Monetary Policy
- Exchange stability: To maintain stable exchange rates and ensure balance in foreign trade and balance of payments.
- Price stability: To control inflation and deflation so that prices remain stable and public confidence is maintained.
- Full employment: To reduce unemployment by regulating credit and encouraging investment and economic activity.
Key Points: Foreign Trade Policy
