Disequilibrium In Balance Of Payments
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Disequilibrium in Balance of Payments
Balance of payments accounts are prepared on the principles of double-entry accounting. And hence in the final analysis, all debits equal all credits.But that does not mean that balance of payments of a nation would always be in equilibrium.
Disequilibrium does arise in a nation’s balance of payments. It may correct itself in short time, or it may persist for a long period of time.
Definition
Balance of payments disequilibrium is said to occur when there is an excess of debits over credits in the current account the is not balanced by an autonomous capital inflow, but requires some accommodating transaction, such as the loss of foreign exchange reserves, official borrowing, or the deprecation of devaluation of the domestic currency.
Causes of Disequilibrium in the Balance of Payments
The disequilibrium in the balance of payments may be caused by a number of factors. These factors can be divided into three groups:
(i) Economic factors: Among these, we may specifically mention the following:
• Large-scale development expenditure that may cause large imports.
• Cyclical fluctuations in general business activity such as recession or depression that may disrupt exports. High domestic prices may discourage exports and induce imports.
• Net source of supply, new and better substitutes to existing products and change in costs will bring about a change in trade flows and hence balance of payments over a period of time.
(ii) Political factors : Political disturbances, like a frequent change of the government, lack of adequate support to the government in parliament, instability of the government etc. generally:
• encourage outflows of capital, and
• discourage inflows of capital.
(iii) Social factors : Changes in tastes, preferences and fashions may affect imports and exports.
BOP disequilibrium when on negative side showing a deficit undermines the economy if fundamental of a country. Therefore, the foremost objective of the central back is to achieve stability in balance of payments.
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(i) Economic factors: Among these, we may specifically mention the following:
• Large-scale development expenditure that may cause large imports.
• Cyclical fluctuations in general business activity such as recession or depression that may disrupt exports. High domestic prices may discourage exports and induce imports.
• Net source of supply, new and better substitutes to existing products and change in costs will bring about a change in trade flows and hence balance of payments over a period of time.
(ii) Political factors : Political disturbances, like a frequent change of the government, lack of adequate support to the government in parliament, instability of the government etc. generally:
• encourage outflows of capital, and
• discourage inflows of capital.
(iii) Social factors : Changes in tastes, preferences and fashions may affect imports and exports.
BOP disequilibrium when on negative side showing a deficit undermines the economy if fundamental of a country. Therefore, the foremost objective of the central back is to achieve stability in balance of payments.
For more help in Disequilibrium in Balance of Payments click the button below to submit your homework assignment