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Discuss whether a policy of expenditure switching is more appropriate than a policy ofexpenditure dampening in an economy with a large balance of payments current accountdeficit and a high rate of inflation.
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Intro: Distinguish between expenditure switching and expenditure dampening
Analysis - Benefits of expenditure switching (Boost to domestic producers, revenue raised for government through imposition of tariffs - diagram, avoids the costs of deflationary policies)
Evaluation - Benefits of expenditure dampening - Avoids the costs of expenditure switching (negative welfare effects of protectionist measures, difficulties for countries in WTO/trading blocs), reduces inflationary pressures and increases competitiveness, reduces import penetration.
Conclusion - Which is more appropriate depends on the reasons for the BoP deficit in the first place. Is it caused by high levels of expenditure on imports or lack of exports.
Dr Mark Potts
Intro: Distinguish between expenditure switching and expenditure dampening
Analysis - Benefits of expenditure switching (Boost to domestic producers, revenue raised for government through imposition of tariffs - diagram, avoids the costs of deflationary policies)
Evaluation - Benefits of expenditure dampening - Avoids the costs of expenditure switching (negative welfare effects of protectionist measures, difficulties for countries in WTO/trading blocs), reduces inflationary pressures and increases competitiveness, reduces import penetration.
Conclusion - Which is more appropriate depends on the reasons for the BoP deficit in the first place. Is it caused by high levels of expenditure on imports or lack of exports.
Dr Mark Potts
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