Country X is facing a situation where its total payments to other countries are greater than its total earnings from abroad. (a) State the term that relates...

Answer Details

(a) The term that relates to the situation

Where a country's total payments to other countries are greater than its total earnings from abroad, the country has an unfavourable (adverse or deficit) balance of payments.

(b) Six measures the country could take to correct the situation

1. Devaluation of the currency: Reducing the value of the local currency makes exports cheaper and more attractive abroad while making imports dearer, so exports rise and imports fall.
2. Import restrictions: Imposing tariffs, quotas and import licences reduces the volume of goods imported and cuts the outflow of foreign exchange.
3. Export promotion: Encouraging exporters through subsidies, incentives and export bonuses increases the country's earnings from abroad.
4. Deflationary policies: Reducing government spending and raising taxes lowers domestic income and demand for imported goods.
5. Exchange control: Government control over the buying and selling of foreign currency limits the amount of foreign exchange available for imports.
6. Encouraging import substitution: Promoting local production of goods formerly imported reduces dependence on imports and saves foreign exchange.

Other measures include borrowing from abroad or the IMF, and encouraging foreign investment and tourism to bring in foreign exchange.