The BOP (Balance of Payments) is a summary of all international transactions of a country and its citizens during one financial year. So friends, in today’s article we are going to know about Disequilibrium in Balance of Payment and also know the types of disequilibrium in balance of payment. So let’s discuss in details.
Table of Contents
Types of disequilibrium in balance of payment
Disequilibrium in balance of payments” refers to an imbalance between a country’s receipts (earnings from exports, tourism, etc.) and payments (imports, investments abroad, etc.). There are basically various types of disequilibrium in bop. In this post we are going to explained the types of disequilibrium in balance of payment.
• Cyclical Disequilibrium – The cyclical disequilibrium arises in BOP due to business cycle. When business cycle or trade cycle arises in a country then it changes output level, price level and income level. Consequently, it will change the pattern of trade.
• Secular Disequilibrium – Secular disequilibrium denotes long run disequilibrium in BOP (Balance of Payments). It arises due to deep rooted changes in the economy. When the economy moves from one stage of growth to another.
• Structural Disequilibrium – It is another type of disequilibrium in BOP. It arises due to structural changes in some sectors of the economy.
As for example – Structural changes in farm sector may change demand and supply pattern which alter the nature of trade. As a result, a country may face deficit or surplus trade.
• Fundamental Disequilibrium – The world fundamental disequilibrium was given by the IMF. It indicates the persistent and long term disequilibrium in the BOP. Such type of disequilibrium may arises due to dynamic factors of changes in economic system. As for example – Continuous growth of population may change the pattern of trade.
Disequilibrium in Balance of Payment
Following are the factors or causes of disequilibrium in balance of payment or causes for disequilibrium in BOP –
• Development Scheme – The main reasons for adverse BOP in the UDC (Under Developing Country) is the huge investment in the development scheme.
In order to developed different sector of the economy, a country imports a foreign technology, raw materials inputs or capital. As a result, that country is facing adverse BOP.
• 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.
• 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. As a result, the export trade of the UDCs also falls. For this reason, disequilibrium condition arises in BOP.
• Demonstration Effect – Generally, the poor people follow the consumption pattern of the rich people. Similarly, a backward country follows the consumption pattern of the western advanced countries. This tendency is called demonstration effect which is responsible for huge import of foreign good. It creates disequilibrium in the BOP.
• International Borrowing and Leading – It is another reasons for the disequilibrium in BOP. The borrowing country tends to have unfavourable BOP, while the leading country tends to have favourable BOP.
• 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.
• Population Exploitation – Rapid growth of population in countries like – China, India and Bangladesh causes huge imports and decreases the capacity to export. As a result, disequilibrium arises in the balance of payments.
• Natural Factor – Natural calamities like – flood, drought, etc. adversely affect the production in the country. As a result, capacity to export decreases and tendency of import rises. So friends, hope you enjoy this article about types and causes of disequilibrium in BOP.
Conclusion
So friends, this was the concept of Disequilibrium in Balance of Payment and also the types of disequilibrium in balance of payment. Hope you get the full details about it and hope you like this article.
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