How can you solve the problem of balance of payment?
First, fall in domestic prices or lower rate of inflation will induce people to buy domestic products rather than imported goods. Second, lower domestic prices or lower rate of inflation will stimulate exports. Fall in imports and rise in exports will help in reducing deficit in balance of payments.
Some of the major important causes of deficit (disequilibrium) in balance of payments are : 1. Economic Factors 2. Political Factors 3. Social Factors.
Balance Of Payment (BOP) is a statement that records all the monetary transactions made between residents of a country and the rest of the world during any given period.
To improve a country's BOP, the government may: prohibit particular luxurious goods, e.g., cars, from getting into the country; or. use deflationary financial policies that reduce the overall level of prices and income.
The balance of payments tracks international transactions. When funds go into a country, a credit is added to the balance of payments (“BOP”). When funds leave a country, a deduction is made. For example, when a country exports 20 shiny red convertibles to another country, a credit is made in the balance of payments.
Finally, the formula for the calculation of BOP is by adding a balance of the current account (step 1), a balance of the capital account (step 2), and a balance of the financial account (step 3), as shown above.
To remove the surplus government will: Deposit the excess foreign exchange in its Foreign Exchange Reserves. This is an accommodating transaction of the government made only to bring equilibrium in the Balance of Payment.
A country's balance of payments tells you whether it saves enough to pay for its imports. It also reveals whether the country produces enough economic output to pay for its growth.
Policies to reduce a current account deficit involve: Devaluation of exchange rate (make exports cheaper – imports more expensive) Reduce domestic consumption and spending on imports (e.g. tight fiscal policy/higher taxes)
A balance of payments surplus means the country exports more than it imports. It provides enough capital to pay for all domestic production. The country might even lend outside its borders. A surplus may boost economic growth in the short term.
What actions would a country take to improve its balance of trade?
- Consume less and save more. If US households or the government reduce consumption (businesses save more than they spend), imports will drop and less borrowing from abroad will be needed to pay for consumption. ...
- Depreciate the exchange rate. ...
- Tax capital inflows.
To remove the surplus government will: Deposit the excess foreign exchange in its Foreign Exchange Reserves. This is an accommodating transaction of the government made only to bring equilibrium in the Balance of Payment.
