This action might not be possible to undo. Are you sure you want to continue?
Balance of Payment is considered in equilibrium when the demand and the supply of the foreign currency of a country are equal. It is hardly considerable that the balance of payments can be in equilibrium. In some countries the demand for the foreign currency is more than the supply of that. On the other hand in some countries the supply of the foreign currency is more than the demand for that. It should be noted that almost all the countries have either a deficit balance of payments position or surplus balance of payments position.
political factors and sociological factors. economic factors. Causes of Disequilibrium The causes of disequilibrium can be divided into three types. .
Economic factors can be further divided into four parts. cyclical disequilibrium. secular disequilibrium and structural disequilibrium. . Economic Factors. developmental disequilibrium.
Such kind of disequilibrium exists because of the economic development of the nations.Developmental Disequilibrium. they increase the imports of machines and other capital equipments. railway and the establishment of the new industries. As we know that most of the developing countries takes up the developmental activities like road. . On the other hand the result of the developmental expenditure is the increase in the level of income of the citizens of that particular country as well as the increase in the demand of foreign consumer goods. As we know that such kind of activities are capital intensive. Now we can say that the developmental expenditure results in the increase of the consumer and the capital goods imports and leads to the deficit in the balance of payments.
. Later it increases the import of capital goods in order to establish new or expand the existing production capacities.Cyclical Disequilibrium Cyclical disequilibrium is concerned with the fluctuations in imports and exports due to business cycles. the countries experiencing boom conditions import consumer goods immediately to meet the increased aggregate demand. Therefore. aggregate demand. The boom in the business activity in one country increases consumption. In contrast. and prices more than production. Both the boom and depression conditions result in disequilibrium in balance of payments. the boom condition increases the imports. the depression conditions contribute to the growth in exports as the production is higher than the aggregate demand and consumption. Thus.
The balance of payments deficit persists for a longer time period due to secular trends in the economy. As a result for a developed country it is better to import goods from other countries where those goods are produced at a lower cost.Secular Disequilibrium. and it will increase the prices of the factors of production as well as that of goods. As we know that the level of income of the citizens of developed countries are very high. as a result the disposable income was also high. .
developments of the alternative sources are considered on structural changes. These structural changes increase the value of imports for capital and consumer goods. Structural Disequilibrium. . And the result is balance of payments deficit. Because of the shifting from agriculture sector to service sector.
As a result the domestic production decreases and it also increases the outflow of capital. . As a result the imports increases and it leads to deficit in the balance of payments. Political Factors. political instability or political uncertainties. Some of the factors like. domestic violence or conflicts among the citizens of a particular nation and external war can affect the balance of payments adversely.
. changes in the existing culture and habits can increase the amount of imports and it leads to the deficit in balance of payments. increase in the standard of the living. Social Factors. Some of the social factors like changes in the tastes and the preferences of the consumers.
The first one is surplus in balance of payments and the second one is deficit in balance of payments. . because it is the most desirable position for all the nations. But in the second condition of the deficit in balance of payments all the countries or the nations take some steps to reduce the deficit or if it is possible to eliminate the deficit. In the first condition when the disequilibrium in balance of payments exists because of the surplus in balance of payments.Methods of Correction of Disequilibrium It should be noted that the disequilibrium in balance of payments exists because of two reasons. all the nations will enjoy this.
Automatic Corrections Deliberate Measures Trade Measures Miscellaneous Measures . These steps or the measures can be divided into four parts.
To correct this situation the possible way is currency devaluation.Automatic Corrections. In this method the external value of the currency has been devaluated. It indicates that the payment for exports is more than the receipts for imports. As we know that the deficit of balance of payments shows a greater demand of foreign exchange than that of supply. so that the country reduces imports and increases exports. This in turns increases foreign exchange reserves and restores equilibrium position. . The increased exchange rate makes the imports costlier and on the other hand exports cheaper.
As per the prima fascia. . The various deliberate measures can be divided into three parts. (2) Devaluation and. (1) Monetary Contraction. (3) Exchange Control. deliberate measures deals with the correction of balance of payments disequilibrium by means of measures taken deliberately with this end view. Deliberate Measures1.
assume a situation of balance of payments deficit to correct which a contraction of money supply is required. Contraction of money supply is likely to reduce the purchasing power and thereby. the fall in imports and rise in exports would help correct the disequilibrium. . Thus. The fall in the domestic aggregate demand and domestic prices is likely to increase exports. Monetary Contraction The level of aggregate domestic demand. the aggregate demand. For instance. domestic price level and the demand for imports and exports may be influenced by contraction or expansion of money supply so that balance of payments disequilibrium may be corrected. It is also likely to reduce domestic prices.
A country with fundamental disequilibrium in the balance of payments may devalue its currency in order to stimulate its exports and discourage imports to correct the disequilibrium. . Devaluation makes export goods cheaper and imports dearer. Devaluation Devaluation means the reduction of the official rate at which the currency is exchanged for another currency.
The recipients of foreign exchange. . Under exchange control. By virtue of its control over the use of foreign exchange. the government can control imports. the government or central bank assumes complete control over the foreign exchange reserves and earning of the country. Exchange Control Exchange control is a popular method employed to influence the balance of payments position of a country. like exporters. are required to surrender foreign exchange to the government or central bank in exchange for domestic currency.
Imports can be controlled by imposing import duties. licensing and many more steps can control the imports. export promotion as well as reduction of imports Export Promotion. Imports Control. . and also through various incentives. providing export subsidy. Exports can be encouraged by reducing the rate of tariffs.Trade Measures Trade measures includes. or by abolishing exports duties. increasing the rate of tariffs and quotas.
apart from what we have discussed above. like the foreign loans. encouraging foreign investment. . Miscellaneous Measures We have many more measures to correct the position of disequilibrium in balance of payments. etc.
Thank You .
This action might not be possible to undo. Are you sure you want to continue?
We've moved you to where you read on your other device.
Get the full title to continue reading from where you left off, or restart the preview.