What is expenditure switching?
Expenditure switching is a macroeconomic policy that affects the composition of a country’s expenditure on foreign and domestic goods. More specifically it is a policy to balance a country’s current account by altering the composition of expenditures on foreign and domestic goods (see Balance of payments account).
What is expenditure reduction?
Expenditure reduction typically means choosing not to address some objectives, goals or intended outcomes. That is, to cut back the scope of production (drop a product line, eliminate product features, cut curricular offerings, address fewer objectives/goals).
What is an example of expenditure switching policy?
These are policies designed to change the relative prices of exports and imports to help reduce the size of a country’s external deficit. For example – an exchange rate depreciation can improve the price competitiveness of exports and make imports more expensive when priced in a domestic currency.
Why devaluation is considered an expenditure switching policy?
Expenditure-switching policies, devaluation or revaluation is the most focused policy to affect current account balances and the equilibrium level of output. Devaluation increases the domestic price of imports and decreases the foreign price of exports; therefore, it decreases imports and increases exports.
What is expenditure reducing policy?
These are policies designed to lower real incomes and aggregate demand and thereby cut the demand for imports. E.g. higher direct taxes, cuts in government spending or an increase in monetary policy interest rates.
How can BOP deficit be corrected?
A deficit in the balance of payments can also be corrected by encouraging exports. Exports can be encouraged by producing quality products, by increasing exports through increased production and productivity, and by better marketing. They can also be increased by a policy of import substitution.
What is the difference between devaluation and depreciation?
A devaluation occurs when a country makes a conscious decision to lower its exchange rate in a fixed or semi-fixed exchange rate. A depreciation is when there is a fall in the value of a currency in a floating exchange rate.
What is expenditure policy?
• Public expenditure policy is a continuous political/bureaucratic. process through which governments decide: (i) which activities. should be undertaken by the government; and (ii) what is the. most efficient way of producing those public sector outputs.
What is the Marshall-Lerner condition and J curve?
The J-Curve is related to the Marshall-Lerner condition, which states: If (PED x + PED m > 1) then a devaluation will improve the current account.
What is expenditure-reducing policy?
What is the difference between devaluation and revaluation?
A revaluation is a calculated upward adjustment to a country’s official exchange rate relative to a chosen baseline. The baseline can include wage rates, the price of gold, or a foreign currency. Revaluation is the opposite of devaluation, which is a downward adjustment of a country’s official exchange rate.
What is the main difference between logistic and exponential growth curves?
In exponential growth, the rate at the beginning is slow but then it gains momentum as the size of the population increases. In logistic growth, the rate is fast at the beginning then slows down eventually because many entities are competing for the same space and resources.
What are the two types of growth curves?
There are two types of growth curves: the j shaped growth curve and the s-shaped growth curve. Both the types of growth curves fit population growth models that have different environmental pressures.
What is J curve?
The J Curve is an economic theory that says the trade deficit will initially worsen after currency depreciation. The nominal trade deficit initially grows after a devaluation, as prices of exports rise before quantities can adjust.
How do you explain J curve?
Key Takeaways A J-curve depicts a trend that starts with a sharp drop and is followed by a dramatic rise. The trendline ends in an improvement from the starting point. In economics, the J-curve shows how a currency depreciation causes a severe worsening of a trade imbalance followed by a substantial improvement.
What is expenditure switching and exchange rate policy?
Expenditure Switching and Exchange Rate Policy Charles Engel Expenditure switching policies These are policies that a government may use to switch consumers’ expenditure away from imports and towards home produced goods. There are two main types – using import controls like tariffs and devaluing the exchange rate.
How do expenditure reducing policies affect the current account balance?
As mentioned previously, by implementing expenditure reducing policies such as increased income taxes, the level of imports will ultimately decrease and improve the current account balance. However, by reducing expenditure overall, AD would also see a drastic shift leftwards.
Do nominal exchange rates lead to’expenditure switching’?
Akashdeep singh Nominal exchange rate changes can lead to ‘expenditure switching’ when they change relative international prices. A traditional argument for flexible nominal exchange rates posits that when prices are sticky in producers’ currencies, nominal exchange rate movements can change relative prices between home and foreign goods.
How can the multiplier effect be reduced?
-Reducing government expenditure to reduce the impact of the multiplier effect (where initial government spending becomes someone else’s income, leading to further consumption and rightwards shifts in AD). -Increasing interest rates to discourage borrowing and thus decreasing consumption and the level of imports.