Theory question 112
Balance of Payments and Exchange RatesSection B (answer four questions only from this section)
(a) Explain the term balance of payments deficit.
(b) What four measures can be taken to reduce the balance of payments deficit of a country?
Show the model answer
Model answer
(a) A balance of payments deficit occurs when a country's total payments to the rest of the world (imports, services, capital outflows) exceed its total receipts from the rest of the world in a given period.
(b) Any four: export promotion; import restriction through tariffs, quotas or bans; devaluation of the currency; exchange control; deflationary fiscal and monetary policies to cut demand for imports; import substitution industrialisation; attracting foreign investment; reducing government spending abroad.
Explanation
Four measures, each explained.