Theory question 109
Balance of Payments and Exchange RatesSection B: answer three questions only from this section.
(a) What is meant by devaluation? (b) Explain the measures by which a country can correct its balance of payments deficit.
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(a) Devaluation is the deliberate official reduction of the value of a country's currency in terms of other currencies
(b) Devaluation: makes exports cheaper and imports dearer
Import restrictions: tariffs, quotas and outright bans
Exchange control: rationing foreign exchange
Export promotion: incentives, subsidies, diversification of exports
Deflationary monetary and fiscal policies to reduce demand for imports
Borrowing from the IMF or other countries
Attracting foreign investment and loans
Using foreign reserves
Import substitution industrialisation
Define devaluation, then explain at least five measures.