Improving a Deficit in the Balance of Payments
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Discuss the alternative policies a government may use to improve a
deficit in the Balance of Payments (BOP)
There are many ways a government can improve a deficit of the BOP.
First we must define the key terms. A deficit is the falling short of
revenue as compared with expenditure; the amount of this deficiency;
the amount required to make assets balance liabilities.
The Balance of payments is a record or overall statement of a
country’s economic transactions with the rest of the world, usually
over a year.
Now it is clear what the question means it is important to understand
what causes a deficit in the BOP. There is often a tendency for UK
consumers to buy foreign output goods leading to an increase in the
amount of imports coming into the county. Often the domestic market
cannot cope with the demand so imports are made to satisfy demand.
Some UK firms have high non-competitive prices so foreign goods are
preferred. Also the quality, designs reliability and after sales
service are important. Declining comparative advantages in many areas
– the advantages are that countries have in producing certain goods
and services change over time as technology alters and other countries
exploit their economic resources and develop competing industries. UK
manufacturing industry has suffered over the years from the emergence
of low cost production in newly industrialised areas such as South
Korea and other parts of Europe.
A controversial opinion is that the overvalued exchange rates mean
that UK exports are very high but imports are relatively cheap.
Foreign consumers are inevitably not going to buy as much British
goods. What’s more, as the imports are cheaper British people buy
foreign goods. The UK used to be a major exporter of oil from the
North Sea fields. Finally this market is now past its peak and doesn’t
contribute much to the BOP.
Protectionist methods are designed to make sure that domestic produce
can compete with international produce so that there is a better
balance of imports and exports.
First of all quotas; this affects the supply of imports. You make
barriers on supply prices higher than normal. With quotas the higher
prices will mean that foreign firms make higher profits. Quotas can be
in terms of volume or value permitted. Sometimes the domestic
government sells licenses to foreign firms they in t...
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...eed to protect it and can trade
on the international stage. The drawback of this is that the industry
will never reach full efficiency because it’s free of the disciplines
of foreign competition.
It also protects against dumping this is when the sale of a good is
below the cost of production. In the short-term consumer’s benefit
from low prices of foreign goods, however in the long - term domestic
businesses will go out of business resulting in the foreign firm
having the monopoly over the market. The consequence of this will be
that they can then charge what they like.
Another important factor is externalities and import controls.
Protecting de – merit goods such as alcohol, tobacco and narcotic
drugs. By imposing high tariff barriers on these or just banning them
it can safeguard society.
There are also non-economic reasons a country may not want to
specialise because if the market declines or there is a better
competitor then there will be mass unemployment. Domestic employment
is key government objectives so by protecting industry you are
ensuring jobs. Protection may be for political reasons, for instance
the UK does not trade with Nigeria and Iraq.
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