Import - - International Economics surplus country which will encourage imports and discourage exports. Fall in prices in the deficit country will encourage exports and discourage imports, leading to restoration of BoP equilibrium. . Interest Rate Adjustments The contraction or expansion of money supply resulting from the BoP deficit or surplus leads to a rise or fall in the interest rates.
A rise in interest rate in the deficit country will encourage investors to withdraw their funds from abroad and invest in their home country. The opposite happens in the surplus country. . Income Adjustment s A nation with payments surplus will experience rising income which will increase imports and thereafter equilibrium is restored in Balance of Payments.
Correction of Balance of payment Disequilibrium Automatic Correction Trade Measures Deliberate Measures Monetary measures . Monetary Contraction / Expansion . Devaluation/ revaluation . Exchange Control .
Price adjustments . Interest rate adjustments . Income adjustments . Capital flows Miscellaneous Measures .
Foreign Loans . Incentives for Foreign investment . Tourism Development . Incentives for foreign remittances .
Import Substitution Export Promotion . Abolition / reduction of duties . Export Subsidies . Export Incentives Import Control .
Import Duties . Import Quotas . Import Prohibition . Capital Flows Changes in the interest rate consequent to the BoP disequilibrium will encourage capital flows from the surplus nations to deficit nations helping restoration of the BoP equilibrium.
II. Deliberate Measures The deliberate measures may be broadly grouped into (a) monetary measures (b) trade measures and (c) miscellaneous measures. - - International Economics a. Monetary Measures .
Monetary Contraction High domestic price level is responsible for high imports and low exports. In order to control inflation, the central monetary authority controls credit. As a result, the prices come down and exports increase. This will help to correct adverse BoP.
However, if credit is controlled, investment will decline, production will go down, prices will increase. This is the cause of confusion between government and RBI in India in 2010s. . Devaluation Devaluation means deliberate reduction of the official rate at which domestic currency is exchanged for another currency.
In other words, devaluation refers to a reduction in the external value of a currency in terms of other currencies. For instance, instead of ₹ per US$, making ₹ per US$. A country with fundamental disequilibrium in the balance of payments may devalue its currency in order to stimulate its exports and discourage imports to correct the disequilibrium. Devaluation makes exports cheaper and imports dearer.
That means making Indian good cheaper for foreigners, and foreign goods costlier for Indians. Indian rupee was devalued three times since . . On 29th September, .
. On 6th June, . On 1st July,