IB Economics/International Economics/Balance of Payment problems

Balance of Payments Problem Consequences of a current account deficit or surplus Methods of correction Devaluation of currency managed changes in exchange rates reduction in aggregate demand/expenditure-reducing policies Increases in taxes/interest rates to shore up spending within a country. Protectionism: reduces imports Currency controls: restricts the amount of foreign currency bought by domestic citizens Supply-side policies: aimed at reducing labor costs, increasing firms' competitiveness change in supply-side policies to increase competitiveness protectionism/expenditure-switching policies Consequences of a capital account deficit or surplus Marshall-Lerner condition States that a devaluation of a country's currency will benefit the country's balance of payments only if the combined elasticity values of exports and imports (in absolute value) are greater than 1. J-curve A theory which indicates that running a current account deficit may prove to worsen the country's balance of payments situation before improvement is observed, possibly due to the time lag.