BOP EQUILIBRIUM MONETARY MEASURES FOR the adjustment in the BOP disequilibrium FISCAL MEASURES For the adjustment in the BOP disequilibrium

1. Department of Economics
Topic:-Monetary and fiscal measures for the adjustment in
the BOP disequilibrium
Course Name:- International economics
Course Code:- ECN 423
Submitted To:-
Dr. Vinod Naik
Asstt. Professor
Department. Of Economics
Submitted By:- Roll no. :-
1.Pawan Kumar CUHP19MAECO19
2. Pratibha Devi CUHP19MAECO20
3. Priyanka kumari CUHP19MAECO21
4. Raman Thakur CUHP19MAECO23

2. BALANCE OF PAYMENT
 Also known as balance of international payments
Definition-
 Balance of payment is summary statement in which all transactions of the
residences of a nation with the residents of all other nations are recorded during a
financial year.
 The balance of payments include both the current account and capital account it
means-
 In BOP, it includes trade of visible items (trade of goods) as well as invisible items
(trade of all services).
 In balance of payment we calculate import and export of the goods and services.

3. Difference between BOP and BOT
Balance of payment
 BOP contains transactions of all
goods and servicer
 means transaction of visible and
invisible goo
 BOP is a broad concept
Balance of trade
 BOT contains transaction of
goods only
 In BOT we measure transaction of
visible goods only
 BOT is narrow concept in
comparison of BOP
 BOT is sub set of BOP

5. EQUILIBRIUM AND DISEQUILIBRIUM IN
BOP
 Balance of payments is the difference between the receipts from foreign and payments to foreigners
by residents of country.
 In accounting sense balance of payments must always balance. Debit must be equal to credit.
 So, there will be equilibrium in balance of payments.
 Symbolically, B= R – P
 Where, B= Balance of payments
 R= Receipts from foreigners(from exports of goods and services, gifts from foreign etc.)
 P= Payments made to Foreigners (for import of goods and services, gifts to foreign etc.)
 When B= Zero, there is said to be equilibrium in balance of payments. It means that there is no
difference payment to foreigners and receipts from foreigners

6.  The BOP deficit or surplus indicate imbalance in the BOP . This imbalance is interpreted as BOP
disqualification
Surplus in BOP
BOP = Favourable :-
CREDIT > DEBIT
EXPORTS > IMPORTS
RECEIPTS> PAYMENT
Deficit in BOP
 Its exactly opposite to the surplus in BOP
BOP = Unfavourable:-
CREDIT < DEBIT
EXPORTS < IMPORTS
RECEIPTS< PAYMENT
 IF THERE IS UNFAVOURABLE BOP ITS NOT GOOD FOR ANY COUNTRY SO THAT HAVE TO CORRECT
UNFAVOURABLE BOP

7. Measures for Correcting Unfavourable BOP
NON MONETARY
MEASURES
MONRTARY MEASURES
1. Deflation:-
2. Depreciation:-
3. Devaluation:-
4. Exchange Control:-
FISCAL MEASURES
1.Tariffs:-
2.Quotas:-
3.Export Promotion:-
4.Import Substitution:-

8. Monetary Policy:-
 Monetary policy is the process by which monetary authority of a
country generally control Bank controls the supply of money in the
economy by exercising its control over interest rate in order to
maintain price stability and achieve high economic growth .
 In India, the central monetary authority is the RBI.
 The monetary methods for correcting disequilibrium in the balance
of payment are as follows

9. Deflation:-
 Opposite of inflation
 Deflation means falling prices.
 A country faces deficit when its imports exceeds exports.
 Deflation is brought through monetary measures like Bank rate, RR,
RRR,CRR,SLR , open market operations, etc.
 Deflation would make our items cheaper in foreign market resulting a rise
in our exports. At the same time the demands for imports fall because now
imported goods are more expensive. This would built a favourable
atmosphere in the balance of payment position.

10. Depreciation:-
 It means the fall in the external purchasing power of home currency
 In this case domestic currencies value fall due to the market forces like
demand and supply.
 As domestic currency value fall – domestic good in foreign market becomes
cheap and foreign good in domestic market becomes expensive because now
we have to pay more for the imported good due to this demand of the import
fall
 This device implies that a country has adopted a flexible exchange rate policy.
 If a country depreciates its currency, people in the country can get more for
same units of the foreign currency.

11. Limitations of Depreciation:-
1. It is not suitable to a country desiring a fixed exchange rate system.
2. Exchange depreciation raises the prices of imports and reduces the prices of exports.
So the terms of trade will become unfavourable for the country adopting it.
3. It increases uncertainty & risks involved in foreign trade.
4. It may result in hyper-inflation causing further deficit in balance of payments

12. Devaluation:-
 Devaluation refers to :- Attempt made by monetary authorities to bring down the
value of home currency against foreign currency.
 devaluation is official act enforced by the monetary authority
 This is also same as the depreciation but difference is that in devaluation domestic
currency value fall due to attempt made by monetary authorities not because of
market mechanism.
 Concept of devaluation used when there is a serious adverse BOP Problem.
Effects of a devaluation
Imports
expensive
Increased aggregate
demand de
Exports cheaper
cheaper

13. Exchange Control:-
 Under such a measure, the central bank directs all exporters to surrender
their foreign exchange to the central authority
 It leads to concentration of exchange reserves in the hands of central
authority.
 Thus At the same time, the supply of foreign exchange is restricted only
for essential goods. It can only help controlling situation from turning
worse. In short it is only a temporary measure and not permanent remedy.

14. Fiscal Policy
Fiscal policy is mean by which a government adjusts its spending level and tax rate to monitor
and influence a nation’s economy. It is a policy concerning the revenue expenditure and debt
of the government for achieving certain objective like central of inflation, public expenditure.
Tariffs:-Tariffs are duties (taxes) imposed on imports.
• When tariffs are imposed, the prices of imports would increase to the extent of tariff.
• The increased prices will reduced the demand for imported goods and at the same time
induce domestic producers to produce more of import substitutes

15. Merits and demerits of Tariff
Merits
1. Prevention to local products
2. Creating employment
3. Strengthen local economy
4. Deduction in the deficit of economy
5. Generates revenue to govt.
Demerits
1. Tariffs bring equilibrium by reducing the volume of
trade.
2. Reduction in the imports.
3. Increasing in the price of imported goods
4. Reduction in the competition
5. Worse effects on the international relations.
6. Reduction in the quality of goods and services

16.  Quotas:-Under the quota system, the government may fix and permit the maximum quantity or
value of a commodity to be imported during a given period. By restricting imports through the quota
system, the deficit is reduced and the balance of payments position is improved
TYPES OF QUOTAS
tariff or custom
quota.
The unilateral quota
the bilateral quota.
The mixing quota.
. Import
licensing.

17. 1. The Tariff Quota:
• Also known as custom quota .
• Under this system, import of a commodity up to a specified quantity is allowed to be imported duty-
free or at a special low rate of duty.
• But imports in excess of this fixed limit are charged a higher rate of duty. The tariff quota thus
combines the features of a tariff with those of quota. Flexibility is another advantage of this system
• Under this quota govt. do an agreement with his trade partner related to quota.
2. The Unilateral Quota:
• It is imposed without prior negotiation with foreign governments
• Imposed import quota without any agreement upon imported commodities by the govt.
• In this its all depends upon the govt. they decide the amount of quota, country on which quota
imposed or govt. divide the quantity of imported commodity between different countries etc.
 The quota so fixed may be either global or allocated:-
• Global quota, the commodity can be imported from any country up to the full amount of the quota
• Allocated quota system, however, the total of the quota is distributed among specified supplying
countries

18. 3. The Bilateral Quota:-
Under this system, quotas are set through negotiation between the
importing country and the exporting country. In this govt. implement
because they have to protect domestic producers.
4. The Mixing Quota:-
Some amount of row material are imported from other country and some amount of
row material produced domestically and combine use of all row material will used to
produced any commodity
Ex. In Brazil, for instance, there is a stipulation that a certain percentage of bread
weight must consist of domestic manioc flour.
5. Import Licensing:
Under this, prospective importers are required to obtain a license from the proper
authorities for importing any quantity within the specified quotas. Licenses are
generally distributed among established importers keeping in view their share in
the country’s import trend.

19. Merits of Quotas:-
1. They are easy to implement.
2.Protect local companies
3. Create more job opportunities
4. Goods becomes less expensive
Demerits of Quotas :-
1. They are not long-run solution as they do not tackle the real cause for disequilibrium.
2. Under the WTO quotas are discouraged.
3. Implements of quotas is open invitation to corruption
4. Monopoly profit
5. Consumers welfare loss

20. Export Promotion:-
 The government can adopt export promotion measures to correct
disequilibrium in the balance of payments.
 This includes substitutes, tax concessions to exporters, marketing facilities,
credit and incentives to exporters, etc.
 The government may also help to promote export through exhibition, trade
fairs; conducting marketing research & by providing the required
administrative and diplomatic help to tap the potential markets.

21. Import Substitution:-
 A country may resort to import substitution to reduce the volume of imports and make it
self-reliant.
 Fiscal and monetary measures may be adopted to encourage industries producing import
substitutes.
 Industries which produce import substitutes require special attention in the form of
various concessions, which include tax concession, technical assistance, subsidies,
providing scarce inputs, etc.

22. Drawbacks of Import Substitution
 1. Such industries may lose the spirit of competitiveness.
 2. Domestic industries enjoying various incentives will develop vested
interests and ask for such concessions all the time.
 3. Deliberate promotion of import substitute industries go against the
principle of comparative advantage.

23. Conclusion -:
 If the balance of payment is in deficit then it is not good for any country because their payments,
imports are more due to this due this our foreign currency reserves fall so action must be needed
to correct the disequilibrium.
 Fiscal policy or non-monetary methods are more effective than monetary methods and are
normally applicable in correcting and adverse balance of payments.
 Because in the fiscal measures inside lags are large but the outside lags are short so that we can
see the effect of fiscal policy more quickly in the economy in comparison of the monetary policy In
which the insides lag are short but the outside lags are larger than the fiscal policy.

24. Thank you so much

25. FREQUENTLY ASKED QUESTIONS
 QUE. 1:- What is the volume of trade
 ANS:-
 The volume of trade refer to the amount of security that was traded during given the period of time . It is
a measure of the market activity and liquidity. Higher trading volume are consider good because they
mean more liquidity and better
 QUE. 2 :- How does CRR helps to improve deflation ?
 ANS:-
 CRR(4%) - Cash Reserve Ratio (CRR) is the share of a bank’s total deposit that is mandated by the
central bank of any country( RBI IN INDIA) to be maintained with the latter in the form of liquid cash.
 How it helps to improve deficit – when bop IS in deficit means our imports is more and the exports are
Less, our imports is more because our purchasing power is more , purchasing power is more because
peoples has more money due to more money supply in this case we can assume that CRR is less
means commercial banks lending power is more
 As CRR increase now commercial banks have to maintain more deposits with the central bank , due to
this their reserves fall , their lending capacity fall , money supply fall , demand fall and finally the imports
fall .

26. •QUE.:-3 . Why under fixed exchange rate system
depreciation is not possible
•Ans. :-
•Fixed exchange rate - Also known as pegged exchange rate.
•it is a type of exchange rate regime in which a currency's value is fixed or pegged by
a monetary authority against the value of another currency.
•Depreciation - It means the fall in the external purchasing power of home currency
•In fixed exchange rate system depreciation is not possible because- in this
case( fixed exchange rate ) domestic currencies value fixed by govt . In case of
depreciation domestic currencies value ( rupees) in comparison of the foreign
currency ( dollar) determined by the market forces like the demand and supply . And
demand and supply changes time to time so that exchange rate also changes
•In case of the fixed exchange rate market mechanism not determine the exchange
rate