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Economics explained


Policies to correct balance of payments disequilibrium

Expenditure switching policies examples

Expenditure switching policies examples

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If a balance of payments deficit persists, and reserves continue to dwindle or foreign debts mount, the government will have to tackle the underlying disequilibrium.

Supply-side policies

Supply-side policies can improve productivity and national output without increasing the general price level, the international competitiveness of the country should improve. For example, firms should become more productive and competitive, which will help to boost the economy's export earnings. Therefore, supply-side policies tend to improve a country's balance of payments

Deflationary fiscal and monetary policies

Deflationary policies have two main effects on the current account:

A substitution effect between home and foreign goods (expenditure switching)

An income effect (expenditure reducing)

Expenditure switching policies

An expenditure switching policy is any action taken by a government that is designed to persuade purchasers of goods and services both at home and abroad to buy

more of that country’s goods and services and
less of the goods and services of other countries.

Expenditure reducing policies

An expenditure dampening or reducing policy is any action taken by a government that is designed to reduce the total level of spending in an economy.

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