IB Economics/International Economics/Balance of Payment problems

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Balance of Payments Problem[edit]

  • Consequences of a current account deficit or surplus
  • Methods of correction
    • Devaluation of currency
  • managed changes in exchange rates
  • reduction in aggregate demand/expenditure-reducing policies
    • Increases in taxes/interest rates to shore up spending within a country.
    • Protectionism: reduces imports
    • Currency controls: restricts the amount of foreign currency bought by domestic citizens
    • Supply-side policies: aimed at reducing labor costs, increasing firms' competitiveness
  • change in supply-side policies to increase competitiveness
  • protectionism/expenditure-switching policies
  • Consequences of a capital account deficit or surplus
  • Marshall-Lerner condition
    States that a devaluation of a country's currency will benefit the country's balance of payments only if the combined elasticity values of exports and imports (in absolute value) are greater than 1.
  • J-curve
    A theory which indicates that running a current account deficit may prove to worsen the country's balance of payments situation before improvement is observed, possibly due to the time lag.