This does not mean that the balance of payment of a country should be in equilibrium individually with every other country with which she has trade relations. This is not necessary nor is it the case in the real world. 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 she has exported to other countries taken together.

• Experience shows that political instability and disturbances cause large capital outflows and hinder Inflows of foreign capital.
• The current account within the balance of payments follows a various sample from one stage to another.
• Thus, the economy is facing surplus demand.
• This situation is termed as excess demand.
• If total value of commodity exports of a country is less than the total value of commodity imports of that country, that country is said to have an ‘unfavourable’ balance of trade.

When a payment is received from a foreign country, it is a credit transaction while payment to a foreign country is a debit transaction. Terms of Trade refers to the ratio of export prices to import prices. Disequilibrium Unemployment is where usually due to the imposition of the minimum wage laws by the government which is means there will be higher demand for jobs then the supply.

How does disequilibrium occur in the balance of payments? Describe the methods of correcting the disequilibrium with examples.

As a result, the prices come down and exports increase. This will help to correct adverse BoP. However, if credit is controlled, investment will decline, production will go down, prices will increase. This is the cause of confusion between government and RBI in India in 2010s. Development disequilibrium is caused by rapid economic development which results in income and price effects. The less developed countries in the early stage of development are not self sufficient.

Commercial borrowings, referring to borrowing by a country from international money market. This involves market rate of interest without considerations of any concession, Borrowings as External Assistance, referring to borrowing by a country with considerations of assistance. It involves lower rate of interest compared to that prevailing in open market. As international transactions are recorded in double entry accounting, the BOP accounting must always balance i.e., total amount of debits must be equal to total amount of credits.

Disequilibrium in Balance of Payment

The rich countries (Eg. USA) need to sell their weapons to promote their economy and generate employment. Hence, wars between countries are stimulated In order to win the wars, the poor countries are forced to buy the weapons from weapon – rich countries, using their export earnings and creating trade deficit. Cyclical disequilibrium occurs because of two reasons. First, two countries may be passing through different phases of business cycle.

The relationship between the value of exports and the value of imports is known as ……………………….. Means the value of imports is in excess of the value of exports. Exchange rates are determined by numerous factors and they are related to the trading relationship between two countries.

Economics

When a payment is received from a foreign country, it is a credit transaction while a payment to a foreign country is a debit transaction. When a country is not able to make the foreign payment, this raises the demand for foreign currencies which in turn leads to fall in foreign exchange rate. This makes exports cheaper and imports dearer.

A country’s terms of trade also determines the exchange rate. Inflation and exchange rates are inversely related. The gains from international trade depend upon the terms of trade which refers to the ratio of export prices to import prices. The ratio causes of autocorrelation between the prices of exports and of imports is called the “net barter terms of trade’. A country’s terms of trade also determine the exchange rate. Foreign capital may enable the country to increase its exports and reduce import requirements.

Write a note on types of BOP Disequilibrium. OR Explain classification of BOP Disequilibrium.

The balance of payments of a country is a systematic record of all economic transactions between the residents of foreign countries during a given period of time. The balance of payments of a country is a systematic record of all economic transactions between its https://1investing.in/ residents and residents of the foreign countries during a given period of time. 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.

• Cyclical Disequilibrium – The cyclical disequilibrium arises in BOP due to business cycle. When business cycle or trade cycle arises in a country then it changes output level, price level and income level. Consequently, it will change the pattern of trade.

The term ………………… means exchange of goods, wares or merchandise among people. Foreign Direct Investments may stimulate domestic enterprises to invest in ancillary industries in collaboration with foreign companies. The Elasticities of demand may differ between countries. Labour is the only element of cost of production. David Ricardo, the British economist in his ‘Principles of Political Economy and Taxation’ published in 1817, formulated a systematic theory called ‘Comparative Cost Theory’.

• This would result in higher prices, which may result in the imports being much higher than the exports.
• Secular or long run disequilibrium is that disequilibrium which occurs due the long run and deep seated changes in the economy which it develops from one stage of growth to another.
• High domestic price level is responsible for high imports and low exports.
• This fall in foreign money worth leads to inflation as import costs rise.
• At the same time, London-held deposits of independent countries, which could exercise the right to choose between gold and the sterling whenever they wanted.

For example, India, following the U.K., devalued her currency in terms of the dollar in September 1949. Her trade balance had been very unfavorable. 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.

Suppose, the autonomous inflow of foreign exchange during the year is $500, while the total outflow is $600. It means that there is a deficit of $100. Current account and capital account which take place due to some economic motive such as profit maximisation. • Investments by Indian residents in shares of foreign companies, real estate abroad, etc.