International Economics

Use of Exchange Controls to Eliminate a Nation’s Balance of Payments (BoP) Deficit

The exchange control refers to a set of restrictions imposed on the international transactions and payments, by the government or the exchange control authority. Exchange control may be partial, confined to only few kinds of transactions or payments, or total covering all kinds of international transactions depending on the requirement of the country.

The main features of a full-fledged exchange control system are as follows:

  • The government acquires, through the legislative measures, a complete domination over the foreign exchange transactions.
  • The government  monopolizes  the purchase and sale of foreign  exchange.
  • Law eliminates the sale and purchase of foreign exchange by the  resident individuals.
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Correction of Balance of Payments (BoP) Deficit

Balance of Payments Adjustments

The short-term and small deficits in balance of payments are quite likely to emerge in wide range of international transactions. These deficits do not call for immediate corrective actions. More importantly, irregular short-term changes in the domestic economic policies with a view to remove the short-term deficits in balance of payments may do  more  harms than good to the economy. Since these changes cause dislocations in the process of reallocation of  resources  and short-term fluctuations in the economy. Therefore, short-term deficits of smaller magnitude are not a serious concern to the policy makers. A constant deficit indicates that the country’s imports dominates exports  or depreciation of its foreign exchange and gold reserves.… Read the rest

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Disequilibrium in Balance of Payments

We have noted above that the balance of payments is always in balances from accounting point of view. Besides, in the accounting procedure, a deficit in the current account is offset by a surplus in capital account resulting from either borrowing from abroad or running down the gold and foreign exchange reserves.  Similarly, a surplus in the current account is offset by a corresponding deficit in capital account resulting from loans and bills to debtor country or by  decline  of  its gold and foreign exchange reserves. However, disequilibrium in the balance of payments does arise because total receipts during the reference period need not be necessarily equal to the total payments.… Read the rest

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Balance of Payments (BoP)

The balance of payment is defined as a systematic record of all economic transactions between the residents of a country and residents of foreign countries during a certain period of time. Although the above definition of balance of payments is quite revealing certain terms used in the definition may require some clarification. The term’s systematic record does not refer to any particular system. However, the system generally adopted is double entry book-keeping system. Economic transactions include all such transactions that involve the transfer of title or ownership. While some transactions involve physical transfer of goods, services, assets and money along with the transfer of title while other transactions do not involve transfer of title.… Read the rest

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Survival of the Fittest in Business

“The law is the survival of the fittest…. The law is not the survival of the ‘better’ or the ‘stronger,’ if we give to those words any thing like their ordinary meanings. It is the survival of those which are constitutionally fittest to thrive under the conditions in which they are placed; and very often that which, humanly speaking, is inferiority, causes the survival.”   €•  Herbert Spencer

At any given time, there may be firms of varying sizes and efficiency in an industry, possibly some making profits and others incurring losses. As long as industry is open for anyone to enter freely, an excess of price over the attainable average total costs will encourage the entry of new firms.… Read the rest

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Inflation in a Developing Economy

Basically, inflation is supposed to occur after reaching the stage of full employment, for till that stage is reached an increase in effective demand and price level will,be followed by an increase in output, income and employment. It is after the stage of full employment when all men are employed that a rise in the price level will not be accompanied by an increase in production and employment.  Theoretically,  therefore, it is not possible to imagine an inflationary situation existing side by side with full employment. It is in this context that the question of inflation in a developing country, which has both widespread unemployment and underemployment is raised.… Read the rest

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