How can balance of payments be reduced?
Policies to reduce a current account deficit
- Devaluation of exchange rate (make exports cheaper – imports more expensive)
- Reduce domestic consumption and spending on imports (e.g. tight fiscal policy/higher taxes)
- Supply side policies to improve the competitiveness of domestic industry and exports.
How can balance of payment be improved in India?
Inflow of capital or capital imports can be used to correct a deficit in balance of payment. If the capital is perfectly mobile between the countries, an increase in the domestic rate of interest above the world rate will result in the inflow of capital. This will reduce the deficit in the balance of payment.
What are the factors affecting balance of payment?
Factors affecting the balance of payments
- The rate of consumer spending on imports.
- International competitiveness.
- Exchange rate.
- Structure of economy – deindustrialisation can harm the export sector.
What are 3 factors that affect the balance of payments?
The BOP is all transactions between entities in one country and the rest of the world over some time. There are three key BOP components, including the current account, capital account, and financial account. The current account must balance with the capital and financial accounts.
What is used to correct deficit in balance of payments?
Stimulation of Exports and Import Substitutes: A deficit in the balance of payments can also be corrected by encouraging exports. Exports can be encouraged by producing quality products, by increasing exports through increased production and productivity, and by better marketing.
How devaluation can correct a deficit in balance of payment?
Devaluation is employed to eliminate persistent balance-of-payments deficits. For example, a devaluation of currency will decrease prices of the home country’s exports that are purchased in the import country’s currency. Thus, its trade will be more in balance and its balance of payments improved.
What does a positive balance of payments mean?
A balance of payments surplus means the country exports more than it imports. It provides enough capital to pay for all domestic production. The country might even lend outside its borders. A surplus boosts economic growth in the short term. There are enough excess savings to lend to countries that buy its products.
Why balance of payment is important?
The importance of the balance of payment can be calculated from the following points: It examines the transaction of all the exports and imports of goods and services for a given period. It helps the government to analyse the potential of a particular industry export growth and formulate policy to support that growth.
What is a good balance of payments?
Theoretically, the BOP should be zero, meaning that assets (credits) and liabilities (debits) should balance, but in practice, this is rarely the case. Thus, the BOP can tell the observer if a country has a deficit or a surplus and from which part of the economy the discrepancies are stemming.
What is used to correct surplus in the balance of payments?
b) CORRECTION OF BOP SURPLUS To remove the surplus government will: Deposit the excess foreign exchange in its Foreign Exchange Reserves. This is an accommodating transaction of the government made only to bring equilibrium in the Balance of Payment.
How does devaluation improve balance of payment?
Why is the balance of payments Important?
A country’s BOP is vital for the following reasons: The BOP of a country reveals its financial and economic status. The BOP statement helps the Government to decide on fiscal and trade policies. It provides important information to analyze and understand the economic dealings of a country with other countries.
What can be done to improve balance of payments?
Trade policy measures to improve the balance of payments refer to the measures adopted to promote exports and reduce imports. Exports may be encouraged by reducing or abolishing export duties and lowering the interest rate on credit used for financing exports. Exports are also encouraged by granting subsidies to manufacturers and exporters.
How to correct the adverse balance of payments?
There are four well-known methods of correcting in adverse balance of payments: 1 Trade Policy Measures: Expanding, Exports and Restraining Imports: Trade policy measures to improve the balance of… 2 Expenditure-Reducing Policies: More
How are trade policies used to improve balance of payments?
1. Trade Policy Measures: Expanding, Exports and Restraining Imports: Trade policy measures to improve the balance of payments refer to the measures adopted to promote exports and reduce imports. Exports may be encouraged by reducing or abolishing export duties and lowering the interest rate on credit used for financing exports.
How does the balance of payments policy work?
Expenditure – reducing policies – designed to control demand and limit spending on imports – squeeze on demand, encouraging rising private sector saving. Expenditure-switching policies – designed to change the relative prices of exports and imports – this causes changes in spending away from imports and towards domestic/export production.
