Saturday, August 22, 2009

Full Employment and Balance of Payments

There is a major policy conflict between full employment and balance of payments. Full employment is always related to balance of payments deficit. Infact the problem is one of maintaining either internal balance or external balance. If there is balance of payments deficit, then a policy of reducing expenditure will reduce imports but it will lead to increase in unemployment in the country. If the government raises aggregate expenditure in order to increase employment, it will increase the demand for imports there by creating disequilibrium in the balance of payments. It is only when the government adopts expenditure-switching policies such as devaluation that this conflict can be avoided but that too temporarily.

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