The policymakers in different countries of the world always aim at achieving equilibrium in the balance of payments over a period of time. As pointed out above disequilibrium in the form of the deficit is a matter of grave concern for the country. Hence, if the country has a deficit in its BOP, then efforts are made by policymakers to either remove or at least reduce the deficit and bring adjustment e in its BOP.
The adjustment measures to correct disequilibrium in BOP can broadly be divided into two types – (A) Automatic (B) Policy Induced or Deliberate.
(A) Automatic Adjustment – Under automatic adjustment, as the name implies, the BOP adjustment comes about automatically, and it is not brought about deliberately by government policy or intervention. The burden of adjustment is on the economy and market forces and not on the government. It is argued that under automatic adjustment if market forces of demand and supply are allowed to have a free play, in course of time, BOP equilibrium will be automatically restored. Assuming fixed or flexible exchange rates, the automatic adjustment in BOP takes place through changes in prices, interest rates, income, and capital flows. Thus, under automatic adjustment, there is no government intervention. However, it is to be noted that automatic adjustment does not conform to reality and has unwanted side effects.
(B) Policy Induced or Deliberate Measures – Under policy-induced adjustment g there is government intervention in correcting disequilibrium in the BOP. As the name implies, deliberate measures are undertaken by the government to correct disequilibrium in the BOP. The government tries to correct disequilibrium through its policy instruments like – monetary & fiscal policy, trade policy, devaluation, exchange controls, etc. Thus, BOP adjustment becomes a matter of policy. However, the government policies designed to correct disequilibrium in BOP cannot neglect the internal problems related to the economy like unemployment, inflation, economic growth, etc.
The adjustment measures to correct disequilibrium in BOP can broadly be divided into two types – (A) Automatic (B) Policy Induced or Deliberate.
(A) Automatic Adjustment – Under automatic adjustment, as the name implies, the BOP adjustment comes about automatically, and it is not brought about deliberately by government policy or intervention. The burden of adjustment is on the economy and market forces and not on the government. It is argued that under automatic adjustment if market forces of demand and supply are allowed to have a free play, in course of time, BOP equilibrium will be automatically restored. Assuming fixed or flexible exchange rates, the automatic adjustment in BOP takes place through changes in prices, interest rates, income, and capital flows. Thus, under automatic adjustment, there is no government intervention. However, it is to be noted that automatic adjustment does not conform to reality and has unwanted side effects.
(B) Policy Induced or Deliberate Measures – Under policy-induced adjustment g there is government intervention in correcting disequilibrium in the BOP. As the name implies, deliberate measures are undertaken by the government to correct disequilibrium in the BOP. The government tries to correct disequilibrium through its policy instruments like – monetary & fiscal policy, trade policy, devaluation, exchange controls, etc. Thus, BOP adjustment becomes a matter of policy. However, the government policies designed to correct disequilibrium in BOP cannot neglect the internal problems related to the economy like unemployment, inflation, economic growth, etc.
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