(a) Explain five measures a country could take to solve its balance of payment problems. (b) State five disadvantages of international trade.

Answer Details

(a) Five measures to solve balance of payments problems

1. Devaluation of the currency: Lowering the value of the home currency makes exports cheaper and imports dearer, thereby increasing exports and reducing imports.
2. Import restriction: Government can impose high tariffs, quotas, and outright bans on certain imports to cut down foreign spending.
3. Export promotion: Government can encourage exports through incentives, subsidies, and improved quality so as to earn more foreign exchange.
4. Deflationary (monetary and fiscal) policy: Reducing money supply and government spending, and raising interest rates and taxes, lowers domestic demand for imports.
5. Exchange control: Government can ration and control the use of foreign exchange so that it is spent only on essential imports; it may also borrow from the IMF and encourage foreign investment.

(b) Five disadvantages of international trade

1. Dumping of goods: Foreign producers may sell goods cheaply below cost, ruining home (infant) industries.
2. Over-dependence on foreign countries: A country may rely too heavily on others for essential goods, which is risky during war or crisis.
3. Unfavourable balance of payments: Excessive importation drains foreign reserves and creates balance of payments deficits.
4. Exhaustion of natural resources: Continuous export of raw materials can lead to the rapid depletion of a country's natural resources.
5. Importation of harmful and undesirable goods: Dangerous goods, and foreign tastes and cultures, may be imported to the detriment of home industries and society.