Q.30. Explain in detail that how are adverse
balance of payments can be corrected?
METHODS OF
CORRECTING AN ADVERSE BALANCE OF PAYMENTS
Following are same of the methods
adopted for correcting and adverse balance of payments.
Improving the
balance of trade through import restrictions & measures of export
promotions
Since balance of payments becomes
adverse because of excess imports over exports, so a country having such a
problem must try to check imports either by total prohibition or by levying
import duties so by a quota system. Another method may be import substitution
i.e. trying to produce in the country what it currently imports. Exports can be
stimulated by measures of export promotion granting subsidies or other
concessions to industrialists and exports.
Depreciation
of the Currency
If a country depreciates its currency
it proves very helpful in increasing the exports of goods. The value of the
home currency fall relatively to foreign currency hence the foreigners are able
to buy move goods with the same amount of their own currency or for the same
amount of goods they have to pay less in terms of their own currency than
before.
Devaluation
A country can turn the balance of
payments in its favour by devaluating her currency. In this case also the
devalued currency will become cheaper in terms of the foreign currency and the
foreigners will be able to buy move goods by paying the same amount of their
own currency. The effect is the same as in the case of depreciation.
Deflation
Deflation means construction of
currency. If currency is contracted then according to the quantity theory of
money the value of the currency will rise or the prices will fall. When prices
fall the country becomes a good country to buy in and not a good country to
sell into Exports will also thus increase and imports will be checked and hence
the balance of trade will become favourable.
Exchange
Control
Under a system of exchange control,
all exporters are asked to surrender their claims or foreign currencies to the
central bank which pays in return the home currency, which the exporters really
want. This available foreign exchange is rationed by the central bank among the
licenced importers. Thus imports are restricted to the foreign exchange
available. There is no danger of more goods being imported than exported.
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