(a) Explain five measures a country could take to solve its balance of payment problems.
(b) State five disadvantages of international trade.
Explanation
(a) Balance of payment adjustment measures:
(i) Imposition of tariff on imported goods to increase their prices with a view to reducing imports.
(ii) Devaluation of local currency to discourage imports. This reduces the value of the country’s currency thus making exports cheaper and imports dearer.
(iii) Establishment of Export Promotion Council with a view to encourage exports.
(iv) Creation of exports free zone where facilities are provided for exporters.
(v) Borrowing from IBRD or IMF (World Bank) to finance present deficit/debit rescheduling.
(vi) Sale of foreign investments and reserves of the country to generate foreign currency to correct present deficit.
(vii) Currency exchange regulation to make it difficult for importers to obtain foreign currency thus restricting imports.
(viii) Imposing restrictions like quota, import licence or outright ban to reduce imports, etc.
(ix) Engagement in counter trade where a country exchanges its goods with imports of other countries.
(x) Encouragement of local production of import substitution goods to reduce import/protection of infant industry.
(xi) Tight monetary and fiscal policy such as reduction in government expenditure, reduction in money supply. Increases in taxes with a view to reducing demand for imports.
(xii) Encouragement of foreign capital inflow into the country for investment and control of repatriation of profits.
(xiii) The government can apply for grants and aids from friendly countries.
(b) Disadvantages of International Trade:
(i) It encourages dumping of goods on countries.
(ii) It creates competition for local manufacturers which could send them out of business.
(iii) It could lead to importation of harmful or dangerous goods.
(iv) It encourages capital flight.
(v) It could lead to balance of payment deficit.
(vi) It could induce local unemployment.
(vii) It could lead to overdependence on foreign goods.
(viii) It could lead to cultural and social alterations. For example importation of clothes and some goods might impact on the life of the people.