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Discuss the alternative policies agovernment may use to improve a deficit in the Balance of Payments (BOP)

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Introduction

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. ...read more.

Middle

Sometimes the domestic government sells licenses to foreign firms they in turn buy and sell licenses amongst each other. Some countries reach export agreements to limit their goods to a specific quota. Whilst other countries can make it difficult for firms to import by imposing restrictions and being deliberately bureaucratic. Exchange control is another method; governments try and stop domestic consumers from spending too much on imports. They can do a number of things; they can restrict the amount of foreign currency available to the public, they can allow the exchange rate to drop by actively intervening. Domestic producers can lower their prices below the market equilibrium by making export subsidies. The final method is tariffs. It can be defined as a tax on imports and is used to restrict imports and raise revenue for the government. The diagram (figure 1) shows the market price at Wp, Qs is how much they can supply the price and Qd is what the consumer demands. As Qd > Qs imports will come into the economy and satisfy demand. A tariff is placed on the value of imports. ...read more.

Conclusion

Short-term protection of nursery industries allows them to grow when it has grown sufficiently there is no need 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. ...read more.

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