Equilibrium and Disequilibrium

When the demand and supply of any foreign currency in a country in a given time period is equal, it
is termed as ‘Equilibrium position’ in the balance of payment. While disequilibrium means that the
condition is either deficit or surplus. The surplus in the balance of payment occurs when the total
payments are exceeded by the total receipts. Similarly, a deficit occurs when the total receipts are
exceeded by total payments. In the other words “Equilibrium is that state of the balance of payments
over the relevant time period which makes it possible to sustain an open economy without severe
unemployment on a continuing basis”.

The essentials in this definition are:

(a) Relevant time period,
(b) Open-ness of economy (i.e., no undue restrictions on imports),
(c) Absence of unemployment, and
(d) Continuing basis of the equilibrium (i.e.; it is capable of being sustained).

The period is generally one year. Thus, seasonal inequality between exports and imports is not a
sign of disequilibrium. When the balance of payments of a country is in equilibrium, the demand
for domestic currency is equal to its supply.

The demand and supply situation is thus neither favourable nor unfavorable. If the balance of
payments moves against a country, adjustments must be made by encouraging exports of goods,
services or other forms of exports, or by discouraging imports of all kinds. No country can have
a permanently unfavorable balance of payments, though it is possible—and is quite common for
some countries—to have a permanently un-favourable balance of trade. Total liabilities and total
assets of nations, as of individuals, must balance in the long run.

This does not mean that the balance of payment of a country should be in equilibrium
individually with every other country with which it has trade relations. This is not necessary nor
is it the case in the real world. Trade relations are multilateral. India, for instance, may have an
active (i.e. surplus) balance of payments with the United States and passive balance with the
United Kingdom and/or other countries. But each country, in the long run, cannot receive more
value than it has exported to other countries taken together.

Equilibrium in the balance of payments, therefore, is a sign of the soundness of a country’s

economy. But disequilibrium may arise either for short or long periods. A continued
disequilibrium indicates that the country is heading towards economic and financial bankruptcy.
Every country, therefore, must try to maintain balance of payments in equilibrium.