IB Economics/International Economics/Balance of Payment problems
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Balance of Payments Problem
- 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.
- 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.