Which policy option is a form of protectionism used to influence the balance of payments?

• A. Do Nothing
• B. Import controls/Protectionism
• C. Devalue exchange rate
• D. Deflation

Answer: (B)

Import controls and other protectionist measures directly aim to curb imports, which reduces the outflow of domestic currency to foreign producers. This lowers the import bill and helps improve the current account part of the balance of payments, which in turn can strengthen the overall balance of payments in the short term. The balance of payments tallies all payments to and from the rest of the world, so reducing import spending reduces one of the main leakage items in the current account, influencing the overall position.

Doing nothing doesn’t alter trade policy, so it won’t actively influence the balance of payments. Devaluing the exchange rate changes competitiveness by making exports cheaper and imports more expensive, but it’s a currency/market-driven adjustment rather than a direct protectionist measure. Deflation contracts overall demand and prices, which can affect imports indirectly, but it isn’t a protectionist instrument aimed at shaping the balance of payments.