EXTERNAL DISEQUILIBRIUM

AND POLICY RESPONSE

SUBMITTED BY GROUP 6 :
AKSHITHA HEGDE
BALU KOSHY
RITU RAJ
SANJANA L
MD RAHBAR ALI
External Disequilibrium:

A change in the price of a product or service can be caused by a variety of

factors. When this occurs, the proportion of items provided to the
proportion sought becomes unbalanced, and the product market is said to
be in disequilibrium. John Maynard Keynes, an economist, first proposed
this hypothesis.
What Happens When Disequilibrium Occurs?

Prices can become highly depressed or inflated when

market equilibrium is out of balance for an extended
period, which can have actual negative consequences for
markets and the larger economy. Market participants will
be rewarded for attempting to restore balance by
purchasing and bidding up underpriced commodities or
securities while selling or generating more of the
expensive ones.
Disequilibrium,
not equilibrium

• The Keynesian IS-LM model is a model of disequilibrium, not

equilibrium.
• The IS curve does not represent the condition that demand
equals supply for goods.
• Instead, the IS curve represents the condition that demand
equals product. There is excess supply, with demand and
product less than supply.
•IS-LM Intersection
Business-Cycle Fluctuation

• A shift in either the IS curve or the LM curve can cause a business-cycle

fluctuation. Different economic forces shift the IS and LM curves, so the
curves shift independently.
• A change in aggregate demand shifts the IS curve but not the LM curve.
• A change in the demand or supply of money or bonds shifts the LM
curve but not the IS curve.
BOP Disequilibrium

• BOP is a double entry accounting record, then apart

from errors and omissions, it must always balance
• The BOP deficit or surplus indicate imbalance in the
BOP
• This imbalance is interpreted as BOP disequilibrium
• A country’s balance of payment is said to be in
disequilibrium when its autonomous receipts (credits)
are not equal to autonomous payments (debits)
Features

• It is a systematic record of all economic transactions between one

country and the rest of the world.
• It includes all transactions, visible as well as invisible.
• It relates to a period. Generally, it is an annual statement.
• It adopts a double-entry book-keeping system. It has two sides: credit
side and debit side. Receipts are recorded on the credit side and
payments on the debit side.
Balance of Trade

• The difference between a country's imports and its exports. Balance of

trade is the largest component of a country's balance of payments.
• Debit items include imports, foreign aid, domestic spending abroad and
domestic investments abroad.
• Credit items include exports, foreign spending in the domestic economy
and foreign investments in the domestic economy.
• When exports are greater than imports than the BOT is favourable and if
imports are greater than exports then it is unfavourable
Balance of The Balance of Payment takes into account all the
transaction with the rest of the worlds
Trade V/s
Balance of
Payment The Balance of Trade takes into account all the
trade transaction with the rest of the worlds
 Economic factors:

Structural changes in economy

Changes in exchange rate

Causes of (overvaluation/undervaluation)
Disequilibrium: Changes in the level of foreign exchange reserves

Cyclical fluctuation

Inflation/Deflation
Causes of Disequilibrium:

Social factors:
• Changes in tastes and preferences due to demonstration
affect, population growth rate etc
Political factors:
• Political stability/instability in the country, change in
diplomatic policy
How Can Disequilibrium
Be Prevented?
Improving market efficiency and information
transmission, as well as removing market
frictions, trade barrier, and some restrictions,
can all help sustain equilibrium.
Policy Response :

Ways of Government Intervention:

1.Economic Policy :
• Supply-side Policies - The government creates supply-
side policies to influence the economy's overall supply.
In most cases, these regulations are aimed at improving
production efficiency in either product or factor
markets. To stay in the market and make a profit,
producers must become more efficient and innovative.
POLICY RESPONSE

• Demand-side policies - Fiscal and monetary policies are examples of demand-side

measures. The government is in charge of fiscal policy, which it implements through
changes in expenditure and taxes. In the meanwhile, the central bank or monetary
authority is in charge of monetary policy. It aims to alter the economy's money supply.
Both have an impact on the economy through affecting aggregate demand.
2. Price Controls :
• Subsidy - Subsidies relieve households of their financial burden. They spend less
money on these goods and services, allowing them to live more comfortably.Subsidies
lower production costs for businesses. It encourages them to make more. They can
also sell the product at a cheaper cost, making it more competitive in the market.This
will ensure that demand and supply are in balance.
POLICY RESPONSE

3.Taxes :
•Taxation is a method of redistribution of wealth. Taxes
can have an impact on how firms and households
manage their finances. In high-inflation situations, raising
taxes helps to close the gap between demand and supply,
thereby maintaining the equilibrium condition.
THANK YOU