Disequilibrium in BOP Its useful for examination Disequilibrium in BOP- Summary International
Contents
The secular or long-run disequilibrium in BOP occur because of long-run and deep seated changes in an economy as it advances from one stage of growth to another. The current account follows a varying pattern from one state to another. In the initial stages of development, domestic investment exceeds domestic savings and imports exceed exports. The secular or long-run disequilibrium in BOP occurs because of long-run and deep-seated changes in an economy as it advances from one stage of growth to another. In the initial stages of development, domestic investment exceeds domestic savings, and imports exceed exports, as it happens in India since 1951. Hence, cyclical disequilibrium in the balance of payments arises due to business cycles.
If there is a change in any of these above given variables and there are no appropriate changes in other variables, then there will be disequilibrium in the balance of payments of that country. The secular or long-run disequilibrium in BOP occurs because of long-run and deep seated changes in an economy as it advances from one stage of growth to another. In the initial stages of development, domestic investment exceeds domestic savings and imports exceed exports, as it happens in India since 1951.
Whenever a country is in boom, it will ordinary experience a more repaid growth in its imports than in its exports, while the opposite will be true in case of recession. This means that the exports growth is more in case of recession. • Natural Factor – Natural calamities like – flood, drought, etc. adversely affect the production in the country.
However, if credit is controlled, investment will decline, production will go down, prices will increase. This is the cause of confusion between government and RBI in India in 2010s. • Changes in foreign exchange rate – One of the most important causes of disequilibrium in BOP is changes in foreign exchange rates. An increases in the external value of money makes imports cheaper and exports dearer. Such a policy creates adverse BOP condition in the economy.
Such structural changes include the development of alternative sources of supply, the development of better substitutes, exhaustion of productive resources, or changes in transport routes and costs. Deflation has been used as a measure to correct deficit disequilibrium. A country faces de ficit when its imports exceeds exports. It is possible by increasing ex”ports and reducing imports. Similarly halting of inflation and correction of exchange rate may also help in this regard. Disequilibrium of surplus arises when the receipts of the country exceed its payments.
Causes for BoP Disequilibrium
All these factors together result in the change of structure of BOP, which leads to instability of the structure. • Business Cycle or Trade Cycle – Business cycle disturbs the smooth working process of the market as well as entire the economy. For this reason, a country may face unfavourable BOP condition. Exports may be encouraged by i).reducing or abolishing export duties, ii). Providing export subsidy, iii).encouraging export production by giving monetary, fiscal, physical and institutional incentives. Cyclical disequilibrium is that disequilibrium which is caused by the fluctuations in the economic activities .
• Fall in Export Demand – UDCs are exporting mainly primary products, such as agriculture product. But in the international market the demand for the primary product falls. For this reason, disequilibrium condition arises in BOP. If income elasticities of demand differ in countries, cyclical disequilibrium may occur from differences in the income elasticities of demand for imports.
The exchange of control permits the use of international exchange solely for the purpose of vital imports and preserves the remaining amount. It is one of the direct methods for keeping check over the imports. Production failure decreases the capacity to export and increases the need for https://1investing.in/ imports. It is a cause of structural deficit in the balance of payments. Short Supply Disequilibrium of balance of payment arises due to a fall in supply. The B0P of a nation is said to be stable when there is equality between the demand and supply of the international exchange rate.
• Structural Disequilibrium – It is another type of disequilibrium in BOP. It arises due to structural changes in some sectors of the economy. Devaluation means deliberate reduction of the official rate at which domestic currency is exchanged for another currency. In other words, devaluation refers to a reduction in the external value of a currency in the terms of other currencies. For instance, instead of 70 ₹ per US$, making ₹ 80 per US$. Financial transactions consisting of direct investment and purchases of interest-bearing financial instruments, non-interest bearing demand deposits and gold fall under the capital account.
Tariffs are duties (taxes) imposed on imports. When tariffs are imposed, the pric~s of
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 the 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 the exports. • Population Exploitation – Rapid growth of population in countries like – China, India and Bangladesh causes huge imports and decreases the capacity to export.
If cyclical disequilibrium occurs from differences in the price elasticities of demand for imports in countries price rise during the boom and fall during the depression. It is quite known that every change in technology brings some comparative advantages which the other country tries to adjust, but the adjustment process itself brings a deficit in balance of payments. Thus, the innovation, whatever form it is, invites disequilibrium.
Marketing facilities of the developing countries have pushed them into huge deficits. Quotas Under the quota system, th~ government may fix and pennit the maximum quantity or value of a commodity to be imported during a given period. By restricting imports through the quota system’, the deficit is reduced and the balance of payments position is improved. Structural Disequilibrium occurs due to changes in the structure of the trade. This may include the development of alternative source of supply, development of better substitutes, exhaustion of productive resources or change in transport routes and costs.
That means making Indian good cheaper for foreigners, and foreign goods costlier for Indians. Structural changes in the economy may also cause balance of payments disequilibrium. Such structural changes include development of alternative sources of supply, development of better substitutes, exhaustion of productive resources or changes in transport routes and costs.
International Trade Finance
I) Two countries may be passing through different paths of business cycle. It is possible that different phases of trade cycles like depression, prosperity, boom, and recession, etc., may disturb terms of trade and cause disequilibrium in balance of payments. For example, during boom period, imports may increase considerably due to increase in demand for imported goods.
- • Changes in foreign exchange rate – One of the most important causes of disequilibrium in BOP is changes in foreign exchange rates.
- Secular disequilibrium occurs from long-run slow moving and deep-seeded changes in the economy due to capital formation growth of population, technological markets, resources etc.
- Production failure decreases the capacity to export and increases the need for imports.
- The shortage in BOP indicates that the demand of international exchange is more than its supply.
- B) If the supply position of a country is affected due factors like crop failure, shortage of raw-materials, strikes, political instability, etc, then there would be the deficit in the balance of payments.
If total value of commodity exports of a country is less than the total value of commodity imports of that country, that country is said to have an ‘unfavourable’ balance of trade. Discuss the various types of disequilibrium in the balance of payments. Secular or long run disequilibrium is that disequilibrium which occurs due the long run and deep seated changes in the economy which it develops from one stage of growth to another.
Balance of Trade (BOT)
Such a situation arises when th~ effective demand for foreign exchange is less than its supply. Such a surplus disequiiibrium is termed as ‘favourable balance’. There is disequilibrium as dearth, in case the funds received from other nations is less than those Pad u international market. Disequilibrium in form of excess takes place, in case the country receives more than what it pays in the international market. This type of condition occurs when the demand is more than the supply of international exchange. Countries, will increase imports and reduce exports causing a deficit in balance of payments.
Development Programmes
In order to developed different sector of the economy, a country imports a foreign technology, raw materials inputs or capital. • Fundamental Disequilibrium cyclical disequilibrium in balance of payment may occur due to – The world fundamental disequilibrium was given by the IMF. It indicates the persistent and long term disequilibrium in the BOP.
