Policies to reduce a balance of

Assuming demand is relatively elastic, this appreciation will worsen the current account.

Policies to reduce a balance of

However, since the UK has a high marginal propensity to import, higher interest rates will tend to cause a reduction in AD and improve the current account significantly. Natural effects of the economic cycle: One would expect to see a trade deficit fall during a recession — so some of the deficit is partially self-correcting — but this does little to address the problems of a structural balance of payments problem. Both of these concepts need a good understanding of exchange rates. They are much more concerned about the control of inflation. They are also relevant to any country that cannot finance current account deficits over the long run as easily as the UK seems to be able to do. Expenditure-reducing policies - these are policies that aim to reduce domestic expenditure and therefore reduce the level of imports. Governments can help in this field by providing tax relief for capital investment and for research and development. In the past, countries have used marketing measures to promote the buying of national goods and services. Therefore, assuming demand is relatively price elastic, we would expect a devaluation to lead to an improvement in X-M and therefore the current account on the balance of payments. Summarise what the Act is How does the Act work to reduce a current account deficit? Likewise expenditure in the domestic economy may switch to cheaper domestically made goods rather than imports. However world organisations such as the World Trade Organisation are opposed to the idea and believe free trade improves economic welfare. Since the Second World War, the inflation rate of the UK has been higher, on average, than all developed countries. This is why this 'expenditure reducing' policy of deflation was often used in conjunction with something like a devaluation.

Policies to reduce a current account could also be classified into two types: 1. Import controls in the form of quotas may also be implemented. This is because the effect on the current account depends on the total value and not just the quantity of exports.

policies to reduce current account deficit

Here is a revision video on structuring an answer to this question on trade. They can include a tightening of fiscal policy or monetary policy; this will reduce aggregate demand.

This can involve tight fiscal or tight monetary policy.

balance of payments

Anyone can cure a current account deficit by having a recession or cure high inflation for that matter - see the last two recessions!

Governments can help in this field by providing tax relief for capital investment and for research and development. The trade balance may improve but at a cost and people may not be willing to accept the trade-off shown in a drop in living standards. The governments of the time tended to try all other policies to reduce the deficit.

solutions to balance of payment deficit
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Balance of Payments