In order to correct adverse balance of payments problem, government should?

Step 1: Analyze the question An adverse (deficit) balance of payments means a country is spending more on imports and other outflows than it earns from exports and other inflows. To correct it, the government must reduce imports and/or increase exports.

Step 2: Concept Policies to correct a deficit include:

• Export promotion (subsidies, tax incentives for exporters)
• Import restriction (tariffs, quotas, import bans)
• Devaluation of the currency
• Reducing domestic demand (which cuts spending on imports)

Step 3: Evaluate each option

• A. Reduce tariffs: Lower tariffs make imports cheaper, so imports rise and the deficit worsens. ✗
• B. Increase subsidies on exports: Subsidies lower the production cost of exporters, making their goods cheaper and more competitive abroad. Exports rise, foreign exchange earnings increase, and the deficit shrinks. ✓
• C. Increase tax on local industries: This raises production costs and discourages output. Exports may fall and the country may import more to fill the gap, which worsens the deficit. ✗
• D. Reduce personal income tax: People have more disposable income and spend more, partly on imports. This worsens the deficit. ✗

Step 4: Answer The correct option is **B.

Exam tip: For balance of payments deficits, remember "Exports up, imports down." Any option that encourages exports (subsidies, incentives) or discourages imports (tariffs, quotas) is usually correct. Any option that makes imports cheaper or boosts spending power works against the goal.