policies to improve balance of payments Flashcards
What are tariffs and quotas?
tariffs- taxes on imported goods
quotas- a limit on the supply of a good or service
3 Short run policies to influence BOP (X-M)
Exchange rate adjustment
Deflationary demand management
Import run restrictions
Long run policy to influence BOP (X-M)
Supply side policies
components of Short run import restrictions
- country reduce spending on imports with tariffs and quotas, reducing quantity of imports
- Causes inflationary pressure (business/consumer costs rise)
what do short run import restrictions depend on?
Whether other countries retaliate with their own restrictions
Whether its legal (EU membership may restrict)
Components of short run deflationary demand management
- Discourage expenditures on imports by deflationary monetary and fiscal policy
- works by reducing consumer spending power eg increased taxes
what does short run deflationary demand management depend on?
Average propensity to consume of imports
Elastic demand for imports
Components of short run exchange rate adjustment?
- Reduce exchange rates if currency is too high (WPIDEC_
- Achieved by selling currency/ reducing interest rates, making foreign products more expensive and domestic products relatively cheaper.
What does exchange rate adjustment depend on?
If demand for X and M is elastic
retaliation of other countries
results in inflationary pressure (rising costs, therefore prices for consumers)
Components of long run supply side policies
If the deficit is caused by lack of quality domestic competitiveness, low labour productivity or high inflation, supply side policies are needed eg subsidies to infant industries/ funds for research and development
What do supply side policies depend on?
time lag effect
large opportunity cost for funds
