Corrective measures of BOP disequilibrium

CORRECTIVE MEASURES OF BOP
DISEQUILIBRIUM

MEASURES
• Deflation
• Devaluations
• Exchange rates
• Exchange Depreciation
1.Monetary
measures
• Export promotions
• Import control
• Quotas
2. Trade
measures

A country faces deficit when its imports exceeds exports. At
times, country will adopt deflationary or dear money policy
• Deflation means falling prices.
 Monetary measures: Bank rate policy, Open market operations,
 Fiscal measures: Higher taxation
• Deflation would make our items cheaper in foreign market
• Higher taxation and reduced income.
• Built a favourable atmosphere in the BOP position.
MONETARY MEASURES_DEFLATION
A rise in exports
A fall in imports

The value of home currency goes down against foreign currency
leads too Deficit BOP, to tackle it Country will implement
devaluation measure
It means reduction of official rates by means of currencies
$1 = Rs.10 (before devaluation)
-- $1 = Rs.20 (after devaluation)
MONETARY MEASURES_ DEVALUATION

• Dollar is exchanged for
more Indian currencies
• Imports become costlier as Indians
have to pay more currencies to
obtain one dollar.
Thus, It encourage exports and decrease imports, makes export cheaper
and imports expensive.
DEVALUATION
Push up demand for Exports
Demand for imports is
reduced

• Life-threatening footstep
• Under this govt. or central bank assumes complete control
over the foreign exchange reserves and earnings of
country.
• Here the Exporters are required to surrender foreign
exchange to the Central Bank. Govt. also have a control
over imports.
MONETARY MEASURES_ EXCHANGE CONTROL

Exchange rate depreciation reduces the value of home
currency in relation to foreign currency.
$1 = Rs.10 (before measure)
-- $1 = Rs.20 (after measure)
As a result, import becomes costlier and export become
cheaper.
MONETARY MEASURE _EXCHANGE DEPRECIATION

Measures to encourage exports and to reduce imports
a) Export Promotions
Exports are encouraged by removing export duties,
providing exports subsidies, monetary, physical and
institutional incentives.
b) Import Control
Imports are controlled by imposing import duties,
import quotas, licensing and prohibiting exports for some
products.
TRADE MEASURES

Under the quota system, the government may
fix and permit the maximum quantity or value of a
commodity to be imported during a given period.
By restricting imports through the quota
system, the deficit is reduced and the balance of
payments position is improved.
TRADE MEASURES _ QUOTAS

Thus, it can be conclude that to overcome the
BOP disequilibrium the government have too
take necessary measures to bring back the
economy in growth path and to compete in
foreign market.
CONCLUSION

Corrective measures of BOP disequilibrium

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