(a) What is meant by devaluation? (b) Explain the measures by which a country can...
(a) What is meant by devaluation?
(b) Explain the measures by which a country can correct its balance of payments deficit.
Explanation
(a)Devaluation is the reduction in the value of the country's currency in terms of other currencies. Devaluation cheap-ens export and makes imports expensive, thus improving the balance of payments.
(b) Measures for correcting balance of payments are:
(i) Export promotion measures: This-is the granting of tax concessions to export based industries thereby reducing export duties to make export cheaper and to earn more revenue.
(ii) Borrowing:A country can borrow money from international financial institutions, e.g. IMF to correct the balance of payment deficit.
(iii) Selling investments abroad: This will enable the country to acquire the foreign exchange it needs to pay for its imports.
(iv) Devaluation: The country can devalue her currency in relation to other currencies to make exports cheaper and imports dearer.
(v) Imposition of tariffs on imports: The balance of payment deficit can be corrected by imposing tariffs on import or total embargo.
(vi) Import substitution measures: The government can encourage industries to replace the goods bought from foreign countries.
(vii) Grants and aids:Grants and aids can be obtained from friendly nations to offset the deficit.