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CA Deficit Correction

CA Deficit Correction. at the end of the lesson you should b able to:. identify the measures in correcting CA Deficit. Measures to Correct CA Deficit. EXPENDITURE SWITCHING POLICIES (Substitution effect) are policies attempting to switch dd away from M towards domestic goods.

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CA Deficit Correction

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  1. CA Deficit Correction

  2. at the end of the lesson you should b able to: identify the measures in correcting CA Deficit

  3. Measures to Correct CA Deficit • EXPENDITURE SWITCHING POLICIES (Substitution effect) • are policies attempting to switch dd away from M towards domestic goods. • happens when relative price of M can be increased and relative price of local X can be reduced.

  4. 1 a)DEVALUATION • means the deliberate attempt by a govt under a fixed ER regime to reduce the par value of its country’s currency vis-a-vis other currencies.

  5. 1b)DEPRECIATION • under the floating ER regime, ER is determined by free market forces of dd n ss. • a fall in the value of a currency in the forex market is known as depreciation.

  6. devaluation / depreciation -  ER • i)   P x exports become cheaper than competitors  Qd of X  X • ii)  Pm • imports become dearer compared to local goods  __ Qd of __   M Devaluation is often taken as a last resort.

  7. b) Depreciation • E.g. ER before devaluation is £1 = US$2. After devaluation, £1 = US$1. • b4 devaluation, a British car priced at £5000 costs US$I0,000 in the USA • After devaluation, it will only cost US$5,000. (Uk’s export become cheaper) • b4 devaluation, an American machine priced at US$30,000 costs £15,000 in UK • After devaluation, it will costs £________ in UK • (Uk’s import dearer)

  8. 2 )PROTECTIONISM • Govt can make X cheaper by - subsidising exporters, tax free holidays etc • make M dearer by imposing tariffs, quotas etc.

  9. Protectionism • i) subsidies   P x exports become cheaper than competitors  Qd of X  X • ii) Tariffs, quotas etc  Pm • imports become dearer compared to local goods  __ Qd of __   M

  10. Measures to Correct CA Deficit • EXPENDITURE REDUCING/ DAMPENING POLICIES (income effect) • are policies aim at reducing the income of consumers so that they reduce their spending on M.

  11. 3 ) DEFLATION • Contractionary Monetary Policy  interest rate  b) Contractionary Fiscal Policy _ G and/or _ T

  12. 4) SUPPLY SIDE POLICY • Improve competitiveness of home produced goods by improving the quality G & S through Research & Development (R&D) n innovation . • Increased productivity & reducing cost per unit • (Non price theory )

  13. 5) DO NOTHING??? • Under the floating ER system, CAD is automatically corrected in the long run. • CADER. The country’s goods will be cheaper n will be more competitive causing X to rise. Its imports will be dearer n dd for foreign goods will fall causing M to fall. • Monetarists believes in the efficiency of the free market.

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