Balance of Payments Disequilibrium

January 11th, 2008 | economics -

Readers Question: Explain what is meant by a balance of payments disequilibrium? The Balance of Payment is comprised of two main components

y y

The Current Account (trade in goods, services + investment incomes The Financial Accout (used to be called capital account)

The balance of payments measures the value of imports and exports. If the UK import more goods and services than we export then we have a deficit on the Current Account. A deficit on the current account is generally referred to as disequilibrium.

The UK currently has a deficit on the current account. Last year in 2007, the trade deficit widened to £4.4bn in the month of December See ONS ± balance of payments Note a large surplus on the current account would also be seen as a disequilibrium.

Overall Equilibrium in Balance of Payment.
In a floating exchange rate, the two components of the Balance of Payments should balance each other out. If the UK has a deficit on the current account of £38bn. Then in a floating exchange rate, the financial account should have a surplus of £38bn. This is because financial outflows must be matched by financial inflows.

Example, If we buy more imported Goods than exported goods then we need financial flows (e.g. hot money, long term capital investment to finance the purchase of imports)

What are the causes for disequilibrium in the balance of payments?
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The balance of payments of a country is said to be in equilibrium

when the demand for foreign exchange is exactly equivalent to the supply of it. The balance of payments is in disequilibrium when there is either a surplus or a deficit in the balance of payments. When there is a deficit in the balance of payments, the demand for foreign exchange exceeds the demand for it. A number of factors may cause disequilibrium in the balance of payments. These various causes may be broadly categorized into: (i) Economic factors ; (ii) Political factors; and (iii) Sociological factors. Economic Factors: A number of economic factors may cause disequilibrium in the balance of payments. These are: Development Disequilibrium: Large-scale development expenditures usually increase the purchasing power, aggregate demand and prices, resulting in substantially large imports. The development disequilibrium is common in developing countries, because the above factors, and large-scale capital goods imports needed for carrying out the various development programmes, give rise to a deficit in the balance of payments. Capital Disequilibrium: Cyclical fluctuations in general business activity are one of the prominent reasons for the balance of payments disequilibrium. As Lawrance W. Towle points out, depression always brings about a drastic shrinkage in world trade, while prosperity stimulates it. A country enjoying a boom all by itselt ordinarily experiences more rapid growth in its imports than its exports, while the opposite is true of other countries. But production in the other countries will be activated as a result of the increased exports to the boom country. Secular Disequilibrium: Sometimes, the balance of payments diequilibrium persists for a long time because of certain secular trends in the economy. For instance, in a developed country, the disposable income is generally very high and, therefore, the aggregate demand, too, is very high. At the same time, production costs are very high because of the higher wages. This naturally results in higher prices. These two factors - high aggregate demand and higher domestic prices may result in the imports being much higher than the exports. This could be one of the reasons for the persistent balance of payments deficits of the USA. Structural Disequilibrium: Structual changes in the economy may also cause balance of payments disequilibrium. Such structural changes include the development of alternative sources of supply, the development of better substitutes, the exhaustion of productive resources, the changes in transport routes and costs, etc. Political Factors: Certain political factors may also produce a balance of payments disequilibrium. For instance, a country plagued with political instability may experience large capital outflows, inadequacy of

. These factors may. changes in tastes. For instance. may affect imports and exports and thereby affect the balance of payments Read more: http://wiki. Causes of Disequilibrium in Balance of Payment 1. cause disequilibrium in the balance of payments. Social Factors: Certain social factors influence the balance of payments. it may not remain balanced always. Disequilibrium of Surplus arises when the receipts of the country exceed its payments. Such a situation arises when the effective demand for foreign exchange is less than its supply. This is called an 'unfavourable balance'. debit exceeds credit or the credit exceeds debit causing an imbalance in the balance of payment account. Population Growth . changes in world trade routes. factors like war. Such an imbalance is called the disequilibrium. Disequilibrium of Deficit arises when our receipts from the foreigners fall below our payment to foreigners. Further. etc. Disequilibrium may take place either in the form of deficit or in the form of surplus. Such a surplus disequilibrium is termed as 'favourable balance'.answers.domestic investment and production. preferences. etc. may also produce balance of payments difficulties. etc. fashions. sometimes. Very often.com/Q/What_are_the_causes_for_disequilibrium_in_the_balance_of_paym ents#ixzz1GfAp1uoF Meaning of Disequilibrium in Balance of Payment Though the credit and debit are written balanced in the balance of payment account. It arises when the effective demand for foreign exchange of the country exceeds its supply at a given rate of exchange.

imports of these items continue for the long time landing these countries in a balance of payment deficit. Since development is a continuous process. 4. their import will increase. Demonstration Effect When the people in the less developed countries imitate the consumption pattern of the people in the developed countries. some raw materials which are not available at home and highly skilled and specialized manpower. To meet their needs. . it may easily cause a fall in the exports and exchange earning of the country concerned. 2. For example. resulting in a disequilibrium in the balance of payments.Most countries experience an increase in the population and in some likeIndia and China the population is not only large but increases at a faster rate. 5. if there occurs a business recession in foreign countries. imports become essential and the quantity of imports may increase as population increases. Their export may remain constant or decline causing disequilibrium in the balance of payments. The exports may decline while the imports may go up causing a discrepancy in the country's balance of payments. Development Programmes Developing countries which have embarked upon planned development programmes require to import capital goods. Cyclical Fluctuations Business fluctuations introduced by the operations of the trade cycles may also cause disequilibrium in the country's balance of payments. Natural Factors Natural calamities such as the failure of rains or the coming floods may easily cause disequilibrium in the balance of payments by adversely affecting agriculture and industrial production in the country. 3.

9. Poor Marketing Strategies The superior marketing of the developed countries have increased their surplus. Globalisation Due to globalisation there has been more liberal and open atmosphere for international movement of goods. will increase imports and reduce exports causing a deficit in balance of payments. Inflation An increase in income and price level owing to rapid economic developmentin developing countries. The emerging new global economic order has brought in certain problems for some countries which have resulted in the balance of payments disequilibrium. The poor marketing facilities of the developing countries have pushed them into huge deficits. countries may lose foreign exchange or gold stocks People in developing countries may also shift their capital to developed countries to safeguard against political uncertainties. . 7. Flight Of Capital Due to speculative reasons. Competition has beer increased due to the globalisation of international economic relations. services and capital. These capital movements adversely affect the balance of payments position. 8.6.

donation and aid are autonomous transactions Induced Transactions : Induced Transactions Balancing transactions are in form of international borrowing and lending They are made for making payments for deficits in Balance of Trade Assessment of BOP : Assessment of BOP Autonomous transactions only are taken into account BOP disequilibrium is of either surplus nature or deficit nature Current account deficit = Net capital inflow Current account deficit is the result of autonomous transaction Net capital inflow is induced transaction Capital account transactions : Capital account transactions Autonomous transactions Official transactions The decrease in official foreign exchange reserves gives the measure of BOP deficit BOP deficit = decrease in official foreign exchange reserves = current account deficit + net capital inflow Causes and Kinds of BOP : .BOP Disequilibrium : BOP Disequilibrium BOP statements are prepared on the principles of accounting There is often a surplus or deficit in BOP This is called Disequilibrium in BOP : Autonomous and Induced Transactions Autonomous transactions are carried out on their own with a view to consume more or make profit They take place on both current and capital accounts Unrequited items like gifts.

Causes and Kinds of BOP Inflation and Fundamental Disequilibrium Business cycle and Cyclic Disequilibrium Structural Changes and Structural Disequilibrium Shortterm Disequilibrium Seasonal deficits caused by crop failure Rapid growth of population in food-deficient countries Ambitious development plans Demonstration effect of advanced countries on developing nations : Automatic Adjustment in BOP BOP Adjustment can be done in two ways Classical Approach Policy Measures : BOP Adjustment Under Fixed Exchange Rate 0 Y0 Y1 Y2 Income Y Interest Rate i3 i2 i0 F E G LM0 LM1 LM2 BOP IS0 i(%) : BOP Disequilibrium(Surplus) and Automatic Adjustment Under Flexible Exchange Rate 0 Y1 Y2 Income Y Interest Rate i2 i1 F E LM IS2 BOP2 BOP1 i(%) IS1 : BOP Disequilibrium(Deficit) and Automatic Adjustment Under Flexible Exchange Rate 0 Y1 Y2 Income Y Interest Rate i2 i1 F E IS1 BOP1 BOP2 i(%) IS2 LM BOP Deficit : BOP adjustment by policy measures : BOP adjustment by policy measures Mundell -Fleming Model Why Mundell ± Fleming model: Required market condition do not exist Economic cost is very high Surplus countries unwilling to allow adjustment .

Revaluation Monetary approach : Trade Deficit (C + I + G) ± Y C + I + G Monetary Policy Fiscal Policy Assumption fixed Exchange Rate Expenditure Changing Policies : BOP Adjustment through Monetary Policy : BOP Adjustment through Fiscal Policy Y0 Y1 Y2 Income (Y) Interest Rate (r) LM r1 r2 r3 IS3 IS2 IS1 K J E3 EB EB¶ E1 E2 : BOP Adjustment through Mix Policy : Assignment Dilemmas in Policy Mix : Mundellian policy Assingment : Parameters are unknown and difficult to determine Determination of exact combination is difficult Prediction may differ due to non-economic factors Capital .: What are policy measures? Expenditure changing policies: .Fiscal policy Expenditure switching policy: .Monetary policy .Devaluation .

750 Trade deficit = Bc 750 Expenditure Switching Policy : Devaluation and Internal and External Balance : Marshall ± Lerner Condition: BOP deficit only if demand is elastic BOP deficit if demand is perfectly inelastic No effect if sum of price-elasticity equals Effectiveness of Devaluation : Empirical Evidence and J-curve effect : Monetary Approach to BOP : .500 A¶s Export = 100 (X) x Bc 60 = Bc 6.500 A¶s Export = 150 (X) x Bc 45 = Bc 6.000 Trade deficit = Bc 4.flow is accommodating not autonomous Conflict between nations Problems in Mundellian policy Assignment : Exchange Depreciation Exchange Appreciation Expenditure Switching Policy : Pre-Devaluation Bc 1 = Ac 5 A¶s Import = 350 (Y) x Bc 30 = Bc 10.500 Expenditure Switching Policy : Post-Devaluation Bc 1 = Ac 7 A¶s Import = 300 (Y) x Bc 25 = Bc 7.

09 : India¶s BOP 2006 .09 : : THANK YOU Types of Disequilibrium in Country's Balance of Payment .Monetary Approach to BOP It was developed by Robert Mundell in 1968 and 1971 and Harry Johnson in 1972. ³BOP bottoms up.09 : India¶s BOP 2006 . BOP surplus results when there is excess of demand of money over the supply of money and vice versa. : Monetary Approach to BOP Demand and the supply of money is transitory phenomenon and is self correcting in the long run. According to the modern monetary approach BOP disequilibrium is a monetary phenomenon.) India¶s BOP 2006 .09 India¶s BOP 2006 .´ : The Self Correcting mechanism 0 100 200 300 400 500 600 20 40 60 80 Ms m (DB) Md E K J L M Surplus Deficit International Reserves (bn Rs.

5. etc. . Some of the important causes of structural disequilibrium are as follows :1. etc. A war also results in structural changes which may affect not only goods but also factor of production causing a disequilibrium in balance of payments. fashions.Balance of Payment of the country is determined by a multiplicity of forces and the equilibrium in it is the resultant of numerous inter-related elements. political instability. strikes. as it is not easy to remove structural imbalance in the economy. If the supply position of a country is affected due factors like crop failure. 4. then there would be the deficit in the balance of payments. A shift in demand due to the changes in tastes. Structural Disequilibrium It takes place due to structural changes in the economy affecting demand and supply relations in commodity and factor market. income. 3. Structural disequilibrium in balance of payments persists for relatively longer periods. then the country's export will decline causing a deficit. Changes in the rate of international capital movements may also cause structural disequilibrium. The main types of disequilibrium in the balance of payment are as follows :- 1. would increase or decrease the demand for imported goods causing a disequilibrium in the balance of payments. shortage of raw-materials. 2. If the foreign demand for a country's products decline due to the discovery of cheaper substitutes abroad.

during recession its export may increase. . Short run disequilibrium may also be caused when a country's imports exceeds exports in a particular year. It is possible that different phases of trade cycles like depression. the importing countries may face cyclical changes. A technological change will give comparative advantage to the innovating country leading to the increase in exports or a decline in imports. may disturb terms of trade and cause disequilibrium in balance of payments. Cyclical Disequilibrium When disequilibrium is caused due to the changes in trade cycles. prosperity. the demand for exports will decline and the exporting country may face a trade deficit. a country may face deficit in its BoP position on account increase in imports. which in turn would reduce demand for imports. during boom period. it is termed as cyclical disequilibrium. Technological Disequilibrium Technological disequilibrium in balance of payments is caused by various technological changes involve inventions or innovations of new goods or new technique of production. etc. there may be recession in the importing countries. Such an disequilibrium may be caused due to international borrowing and lending. say one year is called short run disequilibrium. 4. During recession and depression. Short run Disequilibrium Disequilibrium caused on a temporary basis for a short period. During boom period. 3. imports may increase considerably due to increase in demand for imported goods. recession. For instance. For instance. When a country goes for borrowing or lending it leads to short run disequilibrium. This will create disequilibrium in the balance of payments.2. Also. Such disequilibrium is justified as they do not pose a serious threat. boom. During recession exports may increase due to fall in price. it may pave the way for long run disequilibrium. Therefore. If the short run disequilibrium is persistant & occurs repeatedly. The crisis in India in 1990-91 is nothing but the development of short run disequilibrium. which in turn may affect BoP positions. Such disequilibrium does not pose a serious threat as it can be overcome within a short run. Such disequilibrium is not justified as it has the potentiality to develop in to a crisis in time. However. and as such BoP position may show surplus. imports may be reduced due to fall in demand on account of reduced income. These technological changes affect the demand for factors and goods.

Due to inflation. there emerges a secular deficit in its balance of payments. export items will become expensive. Long-run or fundamental disequilibrium refers to a persistent deficit or a surplus in the balance of payments of a country. When there is a continuous increase in the stock of gold and foreign exchange reserves. quotas and custom duties or monetary tools such as exchange rate depreciation/appreciation. b. which in turn may increase demand for imported goods. devaluation/evaluation. Such a situation may affect the BoP equilibrium. ultimately it would lead to fundamental disequilibrium. the prices of the products in the domestic market rises. and therefore. flexible exchange rates. As a result imports may turn Bop position in disequilibrium. deflation/inflation. Monetary Disequilibrium Monetary disequilibrium.5. 6. . Explain how BOP disequilibrium is restored under a. A permanent deficit or surplus may make a country debtor or creditor causing a fundamental disequilibrium. also contribute to fundamental disequilibrium. a: Using trade barriers such as tariffs. innovations.e. Permanent changes in the conditions of demand and supply of exports and imports cause fundamental disequilibrium. it is called long run disequilibrium The IMF terms such disequilibrium as "Fundamental Disequilibrium". When this becomes chronic. takes place on account of inflation or deflation. growth of population etc. It is also known as secular disequilibrium. When there is a series of short-run disequilibrium in a country's balance of payments. fixed exchange rates. Inflation also results in to increase in money income with the people. when the disequilibrium is persistent & long run oriented. there is a persistent surplus & vise-versa. technological advancements. after you define what a BOP disequilibrium means. Long run or Secular Disequilibrium It prevails for a long period of time i. Deep rooted dynamic changes like capital formation. A developing country in its initial stages may import large amount of capital & hence its imports would exceeds exports.

dividends etc. Services (travel. Current Account (CA) measures the flow of goods. Though some specific tools depend on model you are referring to .b: Only using trade barriers such as tariffs. external and internal. 2 Balance of payments accounts 1 Exports of goods and services (+) ‡ Merchandise. Used for intervention in the FOREX market to influence the ER. Official Settlements Balance (OSB) ² tabulates transactions of reserve assets (gold. foreign currency holdings and reserve position in the IMF) by official government agencies. Private Capital/Financial Account (PFA) ² A tabulation of the flows of financial assets between domestic private residents and foreign private residents. banking etc). services. services. businesses and governments and the rest of the world during a specific time period. investment income and transfers / gifts between domestic residents. SDRs. .) There are few sources of BoP disequilibrium's.balance of payments. quotas and custom duties. BoP .disequilibrium means that open economy has continuing severe unemployment/over-employment (output/GDP etc. ‡ Income from assets held abroad: interest. making bank to pay high costs for maintaining fixed exch-rate). for instance Keynesian models (IS-LM or Mundel-Flemming) may suggest some fiscal tools depending on size of economy. but price level spread may arise. insurance. The Balance of Payments (BoP) A system of accounts that measures transactions of goods. businesses and governments and the rest of the world.you haven't specified it. because monetary policy in this case is just reactive tool to maintain exchange rate (though formally it is possible to use monetary equilibrating correction methods. BoP . income and financial assets between domestic residents.

by capital inflow. net (increase = capital inflow (+)) ‡ Direct investment. CA + PFA = íOSB If the LHS is negative (positive) (implying that there is an excess supply of domestic currency). increase = (-)) 3 9 Statistical discrepancy (+ or -) 10 Allocation of special drawing rights (+) At any point in time. ‡ Foreign investors' income from assets in the reporting country: interest.e. a current account (CA) deficit is financed by a positive capital account (KA). CA + PFA + OSB = 0 or CA = íKA (assuming PFA + OSB = KA) Thus. Note that. dividends etc. the BoP must balance. banking etc). insurance. the sum of debt and credit items is zero. 3 Unilateral transfers ((-) = net outflow) 4 Current account (=1 +2 + 3) 5 Private assets abroad. Portfolio investment 7 Capital account (5 + 6) 8 Change in foreign exchange reserves (4 + 7. quite confusingly. Services (travel. i. 6 Private foreign assets in reporting country.e. Portfolio investment. i. net (increase = capital outflow (-)) ‡ Direct investment. then OSB will have to be positive (negative) ² the central bank finances the deficit by selling FOREX. a reduction (increase) in FOREX reserves show-up . A net debtor nation is one whose stock of foreign financial assets held by domestic residents is less than the stock of domestic financial assets held by foreign residents.2 Imports of goods and services (-) ‡ Merchandise.

That is. a country can not run a BoP deficit indefinitely because eventually it will run out of international reserves. The current account will be in deficit (due to increased imports). explain how balance of payments disequilibria are self-correcting under flexible exchange rates? How can balance of payments disequilibria be corrected under fixed exchange rates? Answer: Balance of payment (BoP) disequilibrium means that the current account deficit (surplus) is not exactly matched by capital account surplus (deficit) and thus the authorities are loosing (accumulating) official settlements balances or international reserves. If the exchange rate is flexible. No.as a positive (negative) number in OSB. the current account is in balance so the there is no implied change in international reserves (represented here by FOREX). 4 Example: What is balance of payments disequilibrium? Can a country run a balance of payments deficit indefinitely? Using a simple diagram. point B. Now. current account will improve and eventually will be in balance again. 5 . the demand for imports increase. then it will depreciate (it is higher at point B than at A). suppose that due to an exogenous shock. BoP adjustment under flexible exchange rates E B S A D / D Quantity of FOREX The foreign exchange market is in initial equilibrium at point A where imports (giving rise to demand for FOREX) are equal to exports (providing supply of FOREX). This will shift the demand curve to the right and the economy will settle at a new equilibrium.

Answer: Basic balance of payments identities show that a country¶s current account balance must equal its net capital flows from abroad.BoP adjustment under fixed exchange rates E S S / B A C D / D Quantity of FOREX After an increase in imports. Thus. a current account deficit is not always a sign of weakness. 6 Money Accounting An important aspect of the CA is that it indicates the rate at which the economy . Being a net debtor (or creditor) is not necessarily ³good´ or ³bad´. the supply curve will shift down and the economy will reach equilibrium at point C. there will be pressure on the exchange rate to depreciate (economy will tend to go to point B). Comment on this statement keeping in view the broad balance of payments concept. Example: A current account surplus is not always a sign of health. A current account deficit means that a country is experiencing net capital inflows form abroad or a capital account surplus. Capital inflows may add to a nation¶s capital stock and increase an average resident¶s ability to purchase goods and services in the future. if the exchange rate is to be kept fixed then the monetary authority will intervene and will meet the increased demand for FOREX (due to an increase in imports) by selling FOREX (international reserves). But. meaning that the country is a net debtor.

CA = ¨NFA (1) The BoP and the Monetary Base Balance Sheet of the Central Bank Assets NFA DC H Liabilities where NFA stands for net foreign assets and DC stands for domestic credit. If assume h = 1 Using the balance sheet identity: NFA DC M cb =+ or cb ¨ = ¨ + ¨7 or cb ¨=¨í¨ (2) NFA M DC NFA DC M M=H. In terms of BoP concepts. using equation (1) and (2) we can see that to avoid a current account . Domestic S M is determined as: M hH S = where h is money multiplier.in the aggregate is adding to its net external assets. Thus. CA surplus equals the increase in net OSB plus the rate of private capital outflow.

the IMF imposes domestic credit ceiling that will ensure that the central bank does not distort the CA targets by excessive financing of government deficits or by loans to the domestic banking system. we write the consolidated banking system¶s (commercial banks and central bank combined) identity: NFA M DC b ¨=¨í¨ (3) 8 Can write ¨DC as: g nb ¨DC = ¨DC + ¨DC where g ¨DC is credit to government and nb ¨DC is credit to non-bank public. Credit Creation and Deficit Finance First. In deficit countries the S M will be contracting. Assuming that the government¶s budget deficit is financed by government (4) . ii) If the central bank intervenes in the FOREX market by buying or selling FOREX (to keep ER fixed). FOREX changes automatically change the stock of M (and an automatic adjustment process for the external balance). DC creation has to be held in line with the growth in M.deficit. The CA. there will be a change in the NFA position and a corresponding change in M. while in surplus countries it expands. To make the program work. 2 points: i) Can understand the BoP stabilization programs conducted by the IMF. Thus.

This could be one of the reasons for the persistent balance of payments deficits of the USA. production costs are very high because of the higher wages. is very high. But production in the other countries will be activated as a result of the increase exports to the boom country. Structural disequilibrium Structural changes in the economy may also cause balance of payments disequilibrium. (5) ()() b nb g ¨NFA = ¨M í ¨DC + T í G í ¨NFA Decrease in the banking system¶s net external asset position have as their counterpart either an increase in credit to the public in excess of a rise in money or a budget deficit that is financed by the domestic banking system. These causes may be broadly categorised into: 1. When there is deficit in the balance of payments. (5) DISEQUILIBRIUM IN BALANCE OF PAYMENT Disequilibrium in balance of payment The balance of payment of a country is said to be in equilibrium when the demand for foreign exchange is exactly equivalent to the supply of it . This naturally results in higher prices. the balance of payments disequilibrium persists for a long time because of certain secular trends in the economy. Political factors . For instance in a developed country. Towle points out. too. Such structural changes include the . iv. These two factors-high domestic prices may result in the imports being much higher than the exports. iii. therefore. and large scale capital goods imports needed for carrying out the various development programmes. A number of factors may cause disequilibrium in the balance of payments. the disposal income is generally very high and. As Lawrance W. 3. aggregate demand and prices. Sociological factors. while the opposite is true of other countries. the demand for foreign exchange exceeds the demand for it. Capital Disequilibrium Cyclical fluctuations in general business activity are one of the prominent reasons for the balance of payments disequilibrium. At the same time. The development disequilibrium is common in developing countries. 1. Secular disequilibrium Sometimes. give rise to a deficit in the balance of payments. because the above factores. depression always brings about a drastic shrinkage in world trade. while prosperity stimulates it. A country enjoying a boom all by itself ordinarily experiences more rapid growth in its imports than its exports. Development Disequilibrium Large scale development expenditures usually increase the purchasing power.borrowing form the banking system or abroad. The balance of payment is in disequilibrium when there is either a surplus or deficit in the balance of payments. resulting in substantially large imports. Economic factors i. Economic factors . (4). ii. 2. we have gg G í T = ¨DC í ¨NFA Using (3). the aggregate demand.

fashion. changes in tastes. 3. These factors may sometimes. For. For instance. Automatic corrections The balance of payment may be automatically corrected under the paper currency standard. inadequacy of domestic investment and production. changes in world trade routes. .development of alternative sources of supply. A number of measures are available to correcting the disequilibrium. a balance of payment deflects. Further factors like wars. Social Factors Certain social factors may also produce a balance of payments. preferences. instance a country plagued with political instability may experience large capital outflows. etc. The theory of automatic correction is that if market forces of demand & supply are allowed to have free play the equilibrium will automatically be restored in course of time. Correction of disequilibrium A country may not bother about surplus in the balance of payment. etc. etc. the changes in transport routes and costs. cause disequilibrium in the balance of payments. etc. Some of them as follows 1. may also produce balance of payments difficulties. the exhaustion of productive resources. 2. may affect imports and exports and thereby affect the balance of payments. Political Factors Certain political factors may also produce a balance of payment disequilibrium. but every country strives to remove or at least to reduce. the development of better substitutes.

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