Policies to correct

balance of payments
disequilibrium
IMPORT
S

EXPORT
S

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 economys 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
Tariffs = tax on imports prices rise
Quotas = limit on quantity of imports
Embargoes = total ban on all imports
Voluntary export agreements = selfimposed 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