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.