b. Measures to correct disequilibrium in the BoP

♤ The BoP disequilibrium is corrected via monetary policy and fiscal policy.

♤ A BoP deficit reflects increasing imports. When there is less money supply in the economy, there is reduced purchasing power, which then reduces the aggregate demand and domestic prices reducing imports.

♤ This fall in the domestic prices would encourage more exports.

♤ Thus, money supply falls - imports decrease and exports go up. This results in the correction of a BoP deficit situation.

♤ By devaluation - Devaluation means reduction of the official rate at which the currency is exchanged for another currency. The idea behind currency devaluation is to stimulate its exports and discourage imports to correct the disequilibrium.

♤ Exchange Control: Under exchange control, the central bank has complete control over foreign exchange reserves and earnings of the country.

♤ Export Promotion: This includes reduction and abolition of the export duties, providing export subsidy, encouraging export production and export marketing so as to increase foreign exchange reserves.

♤ Import Control: This may be done by improving or enhancing import duties, restricting imports through import quotas, licensing and even prohibiting altogether the import of certain inessential items.