Disequilibrium in Balance of Payment
When there is either deficit or surplus, BOP is said to be in disequilibrium.
A deficit in the current account is offset either by a surplus the capital account or by drawing down the gold and foreign exchange reserves. Surplus in the current account, is offset by deficit on the capital account resulting in loans or depletion of gold foreign exchange reserves.
For assessing BOP position, only those transactions which are carried out on their own are taken into account.
Causes of Disequilibrium in Balance of Payment
A. Economic Factors
- Inflation. Increase in prices due to higher wages, higher prices materials, etc., makes export costlier. Which results in deficit in balance of payments.
- Expenditure on Developing Relations. Result in spend huge amount of money on ambassadors, missions, etc. Which has adverse effect on balance of payments.
- Changes in Foreign Exchange Rate. If external value of a country’s currency is increased, imports become cheaper and export become dearer. As a result, imports rise and exports fall.
- Fall in Demand. In foreign markets, exports reduce and results in adverse balance payments.
- Business Cycles. Leads to inflation and depression situations. During depression due to fall in income of the people in foreign countries, the exports to those countries fall. It results in disequilibrium in the balance of payments.
- Import of Services. Underdeveloped countries import capital and other services and have to pay huge amount of money on account of interest, wages, profits, etc. The result is deficit in BOP.
- Population Explosion. Aggregate consumption demand rises due to rapid increase in population. This results in fall in export surplus and adverse balance of payments.
B. Social Factors
When people of underdeveloped countries try to imitate the consumption pattern of developed countries. Their imports increase and results in disequilibrium in balance of payments.
C. Political Factors
Political instability of a country has an adverse effect on balance of payments of a country.
Effects of Disequilibrium in BOP
- Lowers economic credibility
- Hampers economic development
- Reduces foreign exchange reserves of a country.
- Leads to exploitation of a country as foreign dependence sometimes assumes the form of political dependence.