... growth and a balance of payments equilibrium When an economy is growing quickly, consumer spending tends to be high. As we have already noted, British consumers tend to buy goods from abroad in preference to home produced goods. Hence, import growth picks up relative to exports, assuming an average growth rate in the countries that buy British goods, leading to a worsening trade deficit. In the old days, when the balance of payments was seen as possibly the most important macroeconomic objective, the government had three options if they wanted to eliminate the deficit. First, the exchange rate could be devalued within the fixed exchange rate system. A fall in the exchange rate would make exports relatively cheaper and imports relatively more expensive, and so help cure the trade deficit. Unfortunately, the increased import prices also caused inflation to rise. Secondly, import controls could be used. These were physical controls on the number of ...

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