MONETARY MEASURES:

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 demand able. It makes exports cheap and import costly. Thus serves the purpose of receiving more revenues and reducing payments.
4. 
   Exchange control:- This is considered to be an important measure of correcting the disequilibrium in the BOP. Under this method, all the foreign exchange transactions are directly controlled by the central bank of a country. The exporters need to surrender their foreign exchange to the central bank which makes the same available for the purpose of imports.