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Components of Bop
Current Account: is a combination of trade
account and the services account. visible :
include export and import of goods called
merchandise trade. ii. invisible items are
services
Capital Account : records the net flow of FDI in
plant, equipment and long term, short term
portfolio(debt & equity) investment.
a. Short term capital movements : i. purchase of
short term foreign securities eg treasury bills,
commercial bills and acceptance bills. ii.
Speculative purchase of foreign currency iii.
Cash balance held by foreigners.
Causes of disequilibrium
(deficit)
Natural calamities
Increase in incomes
Development
Import prices rising and exports of prices are
stable. In LDCs.
Structural changes
High rate of growth of population
Import restrictions and tariffs
Reduction in Exports : government policies,
increase in income
Correction of Disequilibrium
Monetary Measures:
Deflation : decline in the general price
levels, which is caused by a reduction in
the supply of money. In the market prices
are allowed to fall, currency deflation
results when there is a fall in the income
of the people. Which in turn leads to
decrease in the domestic consumption,
which leads to increase in exports and fall
in imports.
Expenditure changing
Expenditure adjusting policies are monetary and fiscal
tools. A restrictive monetary policy leads to a
reduction in investment and income, thus reducing
imports.
Operation twist short term rate of interest is raised to
attract short term capital from abroad which will cure
the bop deficit and does not disturb economic growth.
Fiscal policy may be very helpful for reducing
expenditure . Taxes may be raised . Both restrictive
monetary and fiscal policies are deflationary in
character and will stimulate exports and discourage
imports.
expenditure switching
polices
Aims at changing relative prices and
it includes variation in exchange
rate, exchange control, devaluation,
import control and export promotion.