Other than depreciation in exchange rate discuss which solution to a balance of trade is best.

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Other than depreciation in exchange rate discuss which solution to a balance of trade is best.

The balance of a trade is the difference between a country’s imports and exports; it is the largest component of a country's balance of payments. Governments implement various polices to improve the balance including: trade restrictions, improvement in supply side policies and deflationary demand management.

Governments may apply tariffs; taxes on imported goods, or quotas; physical restrictions on the number of goods coming into a country. Trade restrictions on various imports will cause prices to rise relative to domestic goods and so the demand for imports should fall and demand for domestic goods should rise, due to consumers turning to cheaper alternatives, leading to an improvement in the balance of trade. However overall, domestic consumers will face higher prices, which also means that there is a loss of consumer surplus and an overall net welfare loss as consumers pay higher prices for goods. There is also a domestic producer surplus as producers are protected from cheap imports, and receive a higher price than they would have without the tariff. Increased market share for domestic producers will consequently lead to an increase in employment as firms expand their businesses in order to be able to meet demand. Placing trade restrictions runs the risk of provoking retaliation. Other countries may respond by increasing their restrictions, as a result the initial country may end up spending less on imports but also earning less from exports and therefore there is little net effect.                        The effect of the tariff depends on the price elasticity of demand and the price elasticity of supply. A tariff will have a greater effect the more elastic the demand and supply. If the demand is inelastic then the imposition of a tariff will have little effect on the level of imports. Tariffs will raise the cost of imported inelastic raw materials and reduce competitive pressure on domestic firms to keep costs and prices low. Subsequently, trade restrictions lead to inflationary pressure on prices, which in the long term can reduce a country’s international competitiveness.

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Governments often use expenditure dampening as a method to improve the balance of trade. This involves raising taxes and or interest rates, in order to apply a deflationary effect on the economy. By increasing taxes people’s income will be reduced and they will have less money to spend on goods and services, as a result aggregate demand will fall and demand for imports will decline, improving the balance of trade. Increasing interest rates will encourage consumers to save and discourage them to borrow money by increasing the price of borrowing, therefore there is less spending and demand for imported elastic ...

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