A) MONETARY MEASURES:
1. Deflation:
Growing demand for foreign goods
in one of the important
causes of disequilibrium in the BOP. For this purpose it is
necessary to cut the purchasing power in the hands of people.
Deflation reduces money supply resulting
in fall in income level of
the people. It reduces demand for both domestic as well as the
foreign goods. It also makes goods available for exports. It is good
but not accepted method by labours
because its reduces their
wages.
2. Exchange rate Depreciation:
It refers to decline in value of domestic currency in terms of
foreign currency. This is natural result of the deficit in the BOP. This
is the automatic adjustment where the value of the currency gets
devaluated with the forces of demand
and supply forces in the
international market. It the observed in the free economy where the
exchange rate gets adjusted with the forces of demand and supply
of goods and services.
3. Devaluation:
It is the most effective method of controlling BOP deficit
problem. It refers to devaluing home
currency to increase export
and reducing imports. This is done by monetary authority
(government). It is an effective method of correcting disequilibrium.
It depends on the circumstances.
In this method , the value of
currency is lowered to make it cheap and demandable.
It makes
exports cheap and import costly. Thus serves the purpose of
receiving more revenues and reducing payments.
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