How to correct the Balance of Payment? Solution to correct balance of payment disequilibrium requires policy changes.

Such policy measures are in the form of monetary, fiscal and non-monetary measures. Monetary Measures for Correcting the BOP The monetary methods for correcting disequilibrium in the balance of payment are as follows :1. Deflation Deflation has been used as a measure to correct deficit disequilibrium. Deflation is brought through monetary measures like bank rate policy, open market operations, etc or through fiscal measures like higher taxation, reduction in public expenditure, etc. 2. Exchange De reciation xchange depreciation means decline in the rate of exchange of domestic currency in terms of foreign currency. This de!ice implies that a country has adopted a flexible exchange rate policy. xchange depreciation will stimulate exports and reduce imports. !. De"aluation De!aluation refers to deliberate attempt made by monetary authorities to bring down the !alue of home currency against foreign currency. "hile depreciation is a spontaneous fall due to interactions of market forces, de!aluation is official act enforced by the monetary authority. #on$Monetary Measures for Correcting the BOP # deficit country adopts the following non-monetary measures to correct disequilibrium in $alance of %ayment. . 1. %ariffs Tariffs are duties &taxes' will reduced the demand for imported goods and at the same time induce domestic producers to produce more of import substitutes. 2. &uotas $y restricting imports through the quota system, the deficit is reduced and the balance of payments position is impro!ed. !. Ex ort Promotion The go!ernment can adopt export promotion measures to correct disequilibrium in the balance of payments. This includes substitutes, tax concessions to exporters, marketing facilities, credit and incenti!es to exporters, etc. '. (m ort )u*stitution # country may resort to import substitution to reduce the !olume of imports and make it self-reliant. (iscal and monetary measures may be adopted to encourage industries producing import substitutes. )ndustries which produce import substitutes require special attention in the form of !arious concessions, which include tax concession, technical assistance, subsidies, pro!iding scarce inputs, etc. *on-monetary methods are more effecti!e than monetary methods and are normally applicable in correcting an ad!erse balance of payments.