Expenditure Dampening and Switching Measures

Expenditure Dampening and Switching Measures

How Can This Be Achieved?

To reduce import expenditure, the key is to implement tight deflationary fiscal and monetary measures:

• Increase taxation
• Reduce govt spending
• Reduce the money supply
• Raise interest rates

Other measures include:

• Trade barriers
• Currency devaluation
• Investing abroad

How It's Executed

Expenditure Dampening Policy

Real Life Example

A government can take action to make imports look more expensive and local goods far more attractive:

• Devaluation of the currency
• Introducing tariffs and quotas
• Providing grants and subsidies
• Trade union reforms
• Reducing corporate tax on firms
• Reducing indirect taxation such as VAT and Ad-valorem

This policy aims at reducing overall expenditure in the country as well as on imports, in order to reduce the outflow of money from the economy. As spending falls, local producers will feel demand for their products has become 'dampened' so they shift to foreign buyers. This measure is designed to reduce imports and at the same time increase exports.

To improve export performance:

• Provide export subsidies
• Lower the value of the currency (PED to be price elastic)
• Lowering corporation tax to increase output

Germany for many years has consistently kept its current account in surplus because local consumers hardly buy or spend money on foreign goods. Exporters are able to sell more goods abroad and earn more revenue.

The entire aim of these two policies is to reduce a current account deficit and outflow of capital, to maintain economic stability to some extent, and to eradicate indebtedness and borrowing from abroad.

Possible Problems

The implementation of an expenditure switching policy can lead to some adverse effects - Less importing means consumers cannot consume and enjoy using wide varieties of products, choice fades and living standards fall. Devaluing the currency will have little effect when importing crucial goods and services such as oil and foodstuff. The use of protectionist measures can lead to foreign retaliation and domestic firm inefficiency.

The problems that can arise

Expenditure Switching Policy

Dampening the spending can reduce aggregate demand in the economy. Less goods and services will be available for consumers so living standards can drop. Unemployment can occur when companies retract their demand for labour when less output is required. Competitiveness falls when foreign goods don't enter the country causing local firms to develop monopolistic behaviour.

This measure is aimed at shifting spending on imports to locally produced products and persuading foreigners to buy the country's exports.