Meaning of Balance of payment: Balance of payment(BoP) is an accounting statement which records economic transactions between Normal Resident of a specific country with the rest of the world.
It is a double entry system, which means it compromises of debit and credit.
In this we ‘Credit’ All Incomes and Gains.
‘Debit’ All Expenses and Loses.
It consists of :
- Current Account
- Capital Account
In an ideal scenario, BoP should be zero. i.e
Current Account + Capital Account = 0
But it rarely happens especially in case of India
So whenever there is a surplus or deficient, BoP is said to be in disequilibrium.
When there is a deficiet, which means payments are more than receipts than a country can finance through its reserve of foreign exchange or gold. The reserve bank sells foreign exchange when there is a deficiet.
Autonomous and Accommodating Transactions
For adjusting the gap in balance of payment let’s look at two terms we use in this context:
When international economic transactions are made for any other reason other than to bridge the gap between surplus or deficient in payment then they are called autonomous transactions, that is, when they are independent of the state of BoP. One reason could be to earn profit. These items are called ‘above the line’ items in the BoP. The balance of payments is said to be in surplus (deficit) if autonomous receipts are greater (less) than autonomous payments.
Often, when the economic transactions are made for the purpose of bridging the gap between Balance of Payment then they are called Accommodating transactions (termed ‘below the line’ items), In other words, they are determined by the net consequences of the autonomous transactions. Since the official reserve transactions are made to bridge the gap in the BoP, they are seen as the accommodating item in the BoP (all others being autonomous).
Reasons for Disequilibrium in Balance of Payment (BoP):
Economic Factors:
Economic Factors are those factors which are realted with an economy of a country. Imbalances in import and Export, Inflation, changes in supply and demand, business cycles(recession and boom),high domestic prices leading to imports are the main factors behind disbalance in balance of payments.
Social Factors:
Often coming of new fashion and changes in taste in terms of clothing of a country causes demand of products from other countries as compared to domestic products.
Political Factors:
Whenever there is political disturbance or the goverments are not stable, this often leads to more imports to fulfill the demands of the citizens of the country. During the time of war, change in reign like from monarchy to democracy this is common occurrence.
Methods for overcoming Disequilibrium in BoP (Balance of Payment):
Making a demand for homegrown products in other parts of world and imposing tarifs are one of the ways to curb the disequilibrium. At times, depriciating a country’s currency in regard to dollar or euro is also seen as method as by that you are making your own country products cheaper and also increasing its demand. Controlling the prices of commodity can also help with diequilibrium.