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Saturday, December 10, 2011

MEASURES TO CORRECT BOP DISEQUILIBRIUM



MEASURES TO CORRECT BOP DISEQUILIBRIUM

All measures used for correcting BOP disequilibrium are broadly classified in to two. They are automatic measures and deliberate measures, deliberate measures are further classified in to monitory measures, trade measures and other measures. These are briefly explained as follows..

(A). Automatic measures: under Gold standard, the automatic working of the economy was correcting the BOP disequilibrium in the long run. When there was deficit, the gold was flowing out of the country. This was contracting the internal circulation of currency. Domestic prices were falling, exports were increasing and slowly the money flows out was flowing in.

Automatic working is possible even under paper standard, the disequilibrium will be automatically restored if the market forces of demand and supply are allowed to have free play. A BOP deficit will increase the demand for foreign exchange. This increases the foreign exchange rate and decreases the external value of the domestic currency . As a result, export of the country become cheaper and imports costlier. This will restore equilibrium.

(B). Deliberate measures:automatic measures are less effective because these are long run in
nature, so the deliberate measures are important.

(1).Monetary measures:

  • deflation: this is used in the case of BOP deficit. A deflationary policy aims at reduction of prices and money income of people. Deflationary policy refers to the contraction of money supply.
  • Devaluation:devaluation refers to the official decrease in the external value of a currency. This measure is adopted when country suffers from severe fundamental disequilibrium. A reduction external value of currency reduce imports, increases exports and restore value of currency.
  • Exchange control: it refers to the regulation of exchange rates and imposition of restriction on the conversion of the local currency against foreign currency.
(2). Trade measures:

  • export promotion measures
  • import control measures
(3). other measures:

  • obtaining foreign loans
  • provide incentives for foreign investments
  • tourism development

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