Balance of Payment Disequilibrium and Causes

1.Balance of Payment
The balance of payment of a country is a systematic accounting record of all economic transactions during a given period of time between the residents of the country and residents of foreign countries.
2.Componets of BOP
Current Account
It includes imports and exports of goods and services and unilateral transfer of goods and services.
Capital Account
Under this are grouped transactions leading to changes in foreign assets and liabilities of the country.
3. Accounting Treatment of Items (Debit and Credit Items)
Any item which gives rise to a sale of foreign exchange (an inflow) is recorded as a credit item (+) in the accounts e.g. export of goods and services
Any item which gives rise to the purchase of foreign exchange (an outflow) is recorded as a debit item (-) in the accounts e.g imports of goods and services.
4. 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 payments is said to be in disequilibrium when its autonomous receipts (credits) are not equal to its autonomous payments (debits).
5.BOP Deficit
A deficit or an unfavorable balance exists when the value of autonomous debit items exceeds the value of autonomous credit items.
6. BOP Surplus
A surplus or a favourable balance exists when the value of autonomous credit items exceeds the value of autonomous debit items.

1. Presentation on Balance of Payment Disequilibrium & Causes

2. Balance of Payment The balance of payment of a country is a systematic accounting record of all economic transactions during a given period of time between the residents of the country and residents of foreign countries.

3. Componets of BOP Current Account It includes imports and exports of goods and services and unilateral transfer of goods and services. Capital Account Under this are grouped transactions leading to changes in foreign assets and liabilities of the country.

4. Accounting Treatment of Items (Debit and Credit Items) Any item which gives rise to a sale of foreign exchange (an inflow) is recorded as a credit item (+) in the accounts e.g. export of goods and services Any item which gives rise to the purchase of foreign exchange (an outflow) is recorded as a debit item (-) in the accounts e.g imports of goods and services.

5. 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 payments is said to be in disequilibrium when its autonomous receipts (credits) are not equal to its autonomous payments (debits).

6. BOP Deficit A deficit or an unfavorable balance exists when the value of autonomous debit items exceeds the value of autonomous credit items.

7. BOP Surplus A surplus or a favourable balance exists when the value of autonomous credit items exceeds the value of autonomous debit items.

8. Types of Disequilibrium Cyclical Disequilibrium Disequilibrium caused by trade cycles Terms of trade and growth of trade undergo a change as a result of trade cycles. It affects BOP. It can be corrected by import-export adjustment Secular Disequilibrium When an economy undergoes intensive changes, it causes secular or long term disequilibrium in the BOP

9. Types of Disequilibrium Cont… Structural Disequilibrium When structural changes take place in some sectors of the economy, they effect import-export trade of the country resulting in structural disequilibrium Fundamental Disequilibrium When a country suffers chronic disequilibrium in its BOP, then according to IMF it will be called fundamental disequilibrium. Temporary Disequilibrium Short term factors account for temporary disequilibrium in BOP.

10. Causes of Disequilibrium Economic factors – The important economic factors are Structural changes in the economy Changes in exchange rates (overvaluation / undervaluation) Changes in the level of foreign exchange reserves Cyclical fluctuations Inflation / deflation Developmental expenditure undertaken by developing countries, etc.

11. Causes of Disequilibrium cont… Social factors – The social factors may include changes in tastes & preferences due to demonstration affect, population growth rate, rate of urbanization, etc. Political factors – The political factors may include – political stability / instability in a country, war, change in diplomatic policy, etc.

12. Measures to correct disequilibrium in BOP Sustained or prolonged deficit has to be settled by short term loans or deplition of capital reserve of foreign exchange and gold.

13. Following remedial measures are recommended… (i)Export Promotion: Export should be encouraged by granting various bounties to manufacturers and exporters. At the same time , imports should be discouraged by undertaking import substitution and imposing reasonable tariffs.

14. (ii)Import: Restrictions and Import Substitution are other measures of correcting disequilibrium. ( iii)Reducing Inflation: Inflation (continuous rice in prices) discourages exports and encourages imports. Therefore, government should check inflation and lower the prices in the country.

15. (iv)Exchange Control: Government should control foreign exchange by ordering all exporters to surrender their foreign exchange to the central bank and then ration out among licensed importers.

16. (v)Devaluation of Domestic Currency: It means fall in the external (exchange) value of domestic currency in terms of a unit of foreign exchange with makes domestic goods cheaper for the foreigners. Devaluation is done by a government order when a country has adopted a fixed exchange rate system. Care should be taken that devaluation should not cause rise in internal price level.

17. (vi)Depreciation: Like devaluation, depreciation leads to fall in external purchasing power of home currency. Depreciation occurs in a free market system wherein demand for foreign exchange far exceeds the supply of foreign exchange market of a country (Mind, Devaluation is done in fixed exchange rate system).

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