These technological changes affect the demand for factors and goods. For instance, during boom period, imports may increase considerably due to increase in demand for imported goods. During recession and depression, imports may be reduced due to fall in demand on account of reduced income. During boom period, a country may face deficit in its BoP position on account increase in imports.
Disequilibrium in Balance of Payments
It prevails for a long period of time i.e. when the disequilibrium is persistent & long run oriented, it is called long run disequilibrium The IMF terms such disequilibrium as „Fundamental Disequilibrium”. The demonstration effect refers to the consumption pattern of developed countries being imitated by developing or under-developed countries. When peoples want to raise the level of a pattern of their consumption, the need for importing more goods arises.
These development programs are time taking process and therefore requires continuous import for a long time which causes disequilibrium. Disequilibrium caused on a temporary basis for a short period, say one year is called short run disequilibrium. Such disequilibrium does not pose a serious threat as it can be overcome within a short run. Such an disequilibrium may be caused due to international borrowing and lending. When a country goes for borrowing or lending it leads to short run disequilibrium.
Monetary Disequilibrium
Unlike the balance of trade, the balance of payments always balances out when all components are accurately accounted for, due to the principles of double-entry booking. The Understanding of the Balance of Payments is crucial in international economics, helping to evaluate a country’s economic performance and predict potential issues. It’s a reflection of the country’s economic interaction with the rest of the world. A BoP surplus or deficit might hint towards broader economic concerns or growth prospects, affecting international investment decisions, policy choices, and the currency’s value.
What are the main components of the Balance of Payments?
Disequilibrium BOP denotes that the value of autonomous receipts is not equal to autonomous payments. The foreign funding has to be returned in the form of foreign exchange only. That is why the Foreign Currency is the backbone of a country’s economic relations with other countries.
Economic Health Indicator
- It takes place due to structural changes in the economy affecting demand and supply relations in commodity and factor market.
- Surplus or deficit of funds in country’s BOP indicates the imbalance or disequilibrium BOP.
- During recession and depression, imports may be reduced due to fall in demand on account of reduced income.
- Balance of payments is a means through which countries controls all their international monetary transactions.
- It’s a reflection of the country’s economic interaction with the rest of the world.
For example, if a country has a persistent current account deficit, it can employ measures to reduce imports, devalue its currency, or increase exports. It takes place due to structural changes in the economy affecting demand and supply relations in commodity and factor market. Structural disequilibrium in balance of payments persists for relatively longer periods; as it is not easy to remove structural imbalance in the economy. Balance of Payments (BOP) is a statistical statement that systematically summarizes all economic transactions between the residents of a given country and the rest of the world during a specific period. These transactions consist of imports and exports of goods, services, money transfer, and financial capital. Disequilibrium occurs when the balance of payment accounts does not balance naturally.
Balance of Payment Disequilibrium & Adjustment of BoP
Such disequilibrium is justified as they do not pose a serious threat. When there is a continuous increase in the stock of gold and foreign exchange reserves. The Automatic measures were useful and relevant when there was Gold Standard. A country with political instability may experience large capital outflow and inadequacy of domestic investment and production. A balance of payments disequilibrium can be causes of global imbalances e.g.
- In other words, the balance of payments of a country is said to be in equilibrium when the demand for foreign exchange in exactly equivalent to the supply of it.
- This indicates the demand and supply of goods, services, and financial assets by a country’s residents.
- On the contrary, disequilibrium is a situation where the balance of payments does not equal zero, meaning that there is a surplus or deficit.
- It is the largest component of a country’s balance of payments on the current account.
- It helps policymakers and economists understand trade flows, investment levels, and the economic health of a nation.
The document discusses the balance of payments (BOP) as an accounting record of economic transactions between residents and non-residents, consisting of the current and capital accounts. It explains BOP disequilibrium, which occurs when autonomous receipts do not equal payments, detailing types of disequilibrium such as cyclical, structural, and fundamental. Additionally, it outlines various causes of disequilibrium and remedial measures such as export promotion, import restrictions, and currency devaluation.
High Population Growth
It denotes the value of imports and exports of a country and tells whether it has surplus or deficit of funds. In a perfect scenario, balance of payment should be zero which simply means value of imports is equal to value of exports. Surplus or deficit of funds in country’s BOP indicates the imbalance or disequilibrium BOP.
When this becomes chronic, there emerges a secular deficit in its balance types of disequilibrium in balance of payment of payments. Technological advancements, growth of population etc. also contribute to fundamental disequilibrium. It refers to the difference between the value of a nation’s exports and the value of its imports.
It is the largest component of a country’s balance of payments on the current account. If it imports more than it exports, it definitely has a trade deficit. The sustained or secular disequilibrium refers to a situation when, the BoP disequilibrium persists for long periods due to certain secular trends in the economy. It is seen in the developed countries where, the disposable income is generally very high and so the aggregate demand is also very high. But due to higher aggregate demands, the production costs are also very high. This would result in higher prices, which may result in the imports being much higher than exports.
A current account deficit, for instance, is offset by inflows in the capital or financial accounts. That implies that a deficit in the current account may cause devaluation through high demand for foreign exchange compared to supply. Conversely, a surplus might lead to the appreciation of the currency due to increased foreign exchange reserves. A developing country in its initial stages may import large amount of capital & hence its imports would exceeds exports.
