(a) Explain the term balance of payments deficit (b) What four measures can be taken...
(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?
Explanation
(a) A balance of payments deficit occurs when the combine receipts on the current and long term capital accounts of a country are less than the corresponding
payments. Or When a country's expenditure flows are more than the country's income flows.
(b) Methods or ways of reducing balance of payment deficit are:
(i) Foreign exchange control — Rationing of foreign exchange
(ii) Expenditure reduction —To cut domestic demand and reduce imports
(iii) Expenditure switching — Exchange rates manipulation to induce people to patronize locally made goods.
(iv) Fiscal control — raising tariffs i.e. increase in import duties.
(v) Increasing exports — to generate more foreign exchange.
(vi) Raising interest rates to reduce bank lending.
(vii) Devaluation.
(viii) Borrowing
(ix) Selling investments abroad