(a) What is meant by devaluation? (b) Explain the measures by which a country can correct its balance of payments deficit.
Explanation
(a)Devaluation is the reduction in the value of the country's currency in terms of other currencies. Devaluation cheap-ens export and makes imports expensive, thus improving the balance of payments. (b) Measures for correcting balance of payments are:(i) Export promotion measures: This-is the granting of tax concessions to export based industries thereby reducing export duties to make export cheaper and to earn more revenue. (ii) Borrowing: A country can borrow money from international financial institutions, e.g. IMF to correct the balance of payment deficit. (iii) Selling investments abroad: This will enable the country to acquire the foreign exchange it needs to pay for its imports. (iv) Devaluation: The country can devalue her currency in relation to other currencies to make exports cheaper and imports dearer. (v) Imposition of tariffs on imports: The balance of payment deficit can be corrected by imposing tariffs on import or total embargo. (vi) Import substitution measures: The government can encourage industries to replace the goods bought from foreign countries. (vii) Grants and aids: Grants and aids can be obtained from friendly nations to offset the deficit.