DISEQUILIBRIUM IN BALANCE OF PAYMENT

DISEQUILIBRIUM IN BALANCE OF PAYMENT 

 

Every country deals with international trade. Number of transactions take place while dealing in international business. These transactions need to be recorded for knowing the position of economy. Therefore the systematic record of the these transactions (import and Export) is recorded in the accounting form. When only merchandise goods or visible goods entries are recorded, it is termed as Balance Of Trade. It may show surplus or deficits. When exports exceed import it shows SURPLUS and when imports exceed exports it shows DEFICIT. In broader sense not only goods but also services are included in systematic way, it is known as Balance Of Payment.

Balance of Payment is the comprehensive term as in it includes international transactions of both visible and invisible goods.

BOP is a systematic record of economic transaction between the residents of the reporting country and the residents of foreign countries during a given period of time.

It includes not only the visible but also invisible goods. It means it does consider not only the merchandise goods but also the services. Therefore it gives true picture of the economy. It is the difference between the outflow of funds and inflow of funds (Payment and Receipt). Theoretically it should get balance but practically it does not tally due to the chances of omission and errors.

Disequilibrium :-

1. Growing population:- It is the unique feature of LDCs (less developed countries). Due to ever increasing population, demand for consumption increases, to feed those need nation has to import more with no exports. It results in BOP disequilibrium.
2. 
   High developmental and Investment programmes:- Huge development and investments programmes in the developing economies are root causes of the disequilibrium in the balance of Payments of these countries. Their propensity to import goes on increasing for want of capital for rapid industrialisation; while exports may not be boosted up to that extent as these is the primary producing countries. Moreover, their exports quantum of primary commodities may decline as newly-created domestic industries may require them. Thus, there will be structural changes in the BOP and structural disequilibrium will result.
3. 
   Reciprocal Demands:- Since intensity of reciprocal demand for products of different countries differs, terms of trade of a nation may be set differently with different countries under multi-trade transactions which may lead to disequilibrium in way.
4. 
   Trade barriers:- Many countries impose tariff and non-tariff barriers to restrict free trade. This reduces exports also and affects in BOP deficit. Putting restriction like quota, tariff barriers, free flow of goods and services is restricted. It brings effects on the composition of exports and imports resulting in BOP disequilibrium.
5. 
   Inflation:- Rapidly rising prices is common issue in almost all the countries but it is particularly grave in the developing economies. Due to inflation they become good to sell in but bad to buy from. It results in less exports and more imports affecting BOP disequilibrium. A rise in the comparative price level certainly encourages imports and discourages exports, resulting in a deficit balance of payments.
6. 
   Demonstration effect:- Due to globalisation and open economy, today people have started copying or imitating west. Demand for goods of MNC‘s is on the height and imparted items have become common. This imitation to foreign nations in consumption pattern reduces exports and increases imports. It also brings BOP disequilibrium.
7. 
   Repayment of debts and interest:- LDC‘s nations take loans or financial assistance from other nations. They have to pay interest thereon regularly. It increases payment side of BOP statement. Even the repayments of old debt taken from IMF or WORD BANK, IDA etc are paid by them. This all affect BOP position of the nation.
8. 
   Increase in income:- With rise in income of the people, their purchasing power also increases for the foreign or imported goods. Also It increases their domestic consumption so export surplus becomes less. So increased income reduces surplus but increases deficit causing BOP deficit.
9. 
   Natural calamities:- Natural disasters like flood, earthquake, storms etc, destroy agriculture and brings food crisis in the nation. In order to manage with the domestic demand of goods and services, the nation has to depend on imports. It adversely affects BOP position.