As a policy maker, propose a comprehensive policy mix to mitigate the negative impact of falling terms of trade on India’s national output and employment. Explain each component of your mix and justify how it helps.
Answer
A mix of monetary easing, fiscal stimulus, export diversification, and import substitution subsidies can help; easing lowers borrowing costs to boost investment, fiscal stimulus increases aggregate demand, diversification reduces dependence on falling commodity prices, and subsidies support domestic industries to protect employment.
Step-by-step solution
- Monetary easing: Reduce policy rate to lower borrowing costs, encouraging investment and consumption, thus boosting output.
- Fiscal stimulus: Increase government spending or cut taxes to raise aggregate demand directly, supporting employment.
- Export diversification: Promote manufacturing of non‑commodity goods to reduce vulnerability to commodity price shocks, sustaining export earnings.
- Import substitution subsidies: Provide financial incentives for domestic production of goods previously imported, preserving jobs and improving trade balance.
Common mistake: Focusing solely on monetary policy
Concept tested: Policy response to terms‑of‑trade shock
Published · How this solution was prepared and checked
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