Corrective measures of BOP disequilibrium

Monetary measures and trade measures of BOP disequilibrium

1. Corrective measures of BOP disequilibrium

2. measures

3. 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, O pen market operations , F iscal 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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