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Economics explained


Policies to correct balance of payments disequilibrium

Expenditure reducing policies- deflationary monetary policy

Expenditure reducing policies- deflationary monetary policy

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Supply-side policy measures may reduce a current account deficit and a financial account deficit by making domestic products more price competitive and by making domestic markets more attractive to invest in.

Deregulation and privatisation

Deregulation and privatisation may increase the competitive pressure on domestic firms to keep costs and prices low, to improve quality and to become more responsive to changes in consumer demand.

Increased spending on education and training and increased investment

Increased spending on education and training and increased investment may also increase exports and encourage foreign direct investment. A more skilled labour force and better capital equipment may reduce the relative price of domestic output and raise its quality.

Trade union

Trade union reform may enable domestic firms to work with more flexibility and so be more responsive to changes in demand. A resulting fall in industrial action may, in addition, make multinational companies more willing to invest in the country.

The effectiveness of supply-side policies

Short term

Some supply-side measures, for example, increased spending on education, may not be very effective in the short term as they can take a long time to have an effect.

Long term

In the long term, however, they have the potential to be very effective. This is because they may directly tackle the problems causing the country’s products to lack international competitiveness.

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