Page 227 - DECO503_INTERNATIONAL_TRADE_AND_FINANCE_ENGLISH

Unit 19 : Expenditure Reducing and Expenditure Switching Policies

(v) If the U.S. buys Web services from an Indian company, and the Indian company deposits the Notes
payments in the branch of an American bank, it will be reflected in the U.S. balance of
payments as:
(a) A credit in the current account and a debit in the current account.
(b) A credit in the financial account and a debit in the financial account.
(c) A debit in the current account and a credit in the financial account.
(d) A credit in the current account and a debit in the financial account.
(vi) What is official settlements balance?
(a) Another name for the financial account.
(b) One of the accounts in the balance of payments.
(c) Another name for the capital account.
(d) Everything in the balance of payments except for the official foreign reserves.
19.3 Summary

• The need for BOP adjustment, particularly of deficit disequilibrium, is clear. A nation’s ability
to absorb deficits is broadly limited by its stock of official international reserves — gold and
generally acceptable foreign currencies — and the willingness of foreign countries to hold its
currency as part of their own international reserves. Accommodating short-term capital
borrowings can help in prolonging BOP deficit adjustments, but they cannot be relied upon
indefinitely.
• The expenditure changing policies, also called ‘expenditure adjusting’ policies, refer to the policies
that are aimed at changing (reducing or increasing) the aggregate expenditure in the domestic
economy. Countries facing BOP deficit due to trade deficits adopt expenditure reducing policies.
• Monetary policy refers to the measures adopted by the monetary authority to increase or decrease
1
the money supply and availability of credit. A monetary policy aimed at increasing the money
supply and availability of credit to the public is called expansionary monetary policy or ‘easy
money policy.’ And, a monetary policy aimed at decreasing the money supply and availability
of credit to the public is called contractionary monetary policy or ‘dear money policy.’
• The conclusions that emerge from the analysis of effects of the monetary policy is that a
contractionary monetary policy reduces the BOP deficits and helps in achieving internal and
external balance, and an expansionary monetary policy reduces country’s BOP surplus.
• Practice, however, most countries use a monetary-fiscal mix to correct their adverse BOP. We
have noted that a contractionary monetary policy is helpful in correcting the BOP deficit, whereas
an expansionary fiscal policy is preferable for correcting the BOP deficit. So a country opting
for using a monetary-fiscal mix for correcting its BOP deficit would adopt a combination of
contractionary monetary and an expansionary fiscal policy.
• The expenditure-switching policy is one that aims at attaining the internal and external balance
by switching the domestic expenditure from imported to domestic goods or the other way
round depending on the need of the country. The expenditure-switching policy works through
the change in relative prices of imports and domestic goods. Under free market conditions, the
relative prices of imports and domestic goods change on their own either due to exchange
depreciation or exchange appreciation.
19.4 Key-Words

1. Expenditure switching policy : It is a policy which government tends to switch the consumer's
purchase on foreign goods to domestic goods whereas
expenditure dampening policy which also known as expenditure
reducing policy is a reducing the consumption of imported goods
to ensure the balance of payment of a country to become worsen.

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