(a) What is (i) devaluation: (ii) depreciation of currency? [4 marks each] (b) Outline three measures that can be adopted to correct balance of payments def...

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(a)(i) Devaluation. Devaluation is a deliberate reduction in the official (external) value of a country's currency in relation to other currencies (or gold) by the government or monetary authority, under a fixed exchange-rate system. It makes the country's exports cheaper and its imports dearer.

(a)(ii) Depreciation of currency. Depreciation is a fall in the external value of a country's currency brought about by the free forces of demand and supply in the foreign-exchange market, under a floating (flexible) exchange-rate system, rather than by a government decision. The key difference is that devaluation is a deliberate act of the authorities under a fixed rate, while depreciation happens automatically through market forces under a floating rate.

(b) Three measures to correct a balance of payments deficit. A deficit means the country's total payments to abroad exceed its total receipts from abroad.

1. Devaluation of the currency. Reducing the external value of the currency makes exports cheaper and imports dearer, so exports rise, imports fall, and the deficit narrows.
2. Import restrictions. Imposing tariffs, quotas, or an outright ban on non-essential imports reduces the amount spent abroad and improves the balance.
3. Deflationary (contractionary) policy. Reducing domestic demand through higher taxes, reduced government spending, and higher interest rates lowers spending on imports and frees goods for export. (Other valid measures: export promotion and diversification, exchange control, and seeking foreign loans or aid.)