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Types of Disequilibrium in Country Balance of Payment

Balance of Payment of the country is determined by a multiplicity of forces and the equilibrium in it is the resultant of numerous inter-related elements.

Types of Disequilibrium In The Balance of Payment

The main types of disequilibrium in the balance of payment are as follows :-

square 1. Structural Disequilibrium

It takes place due to structural changes in the economy affecting demand and supply relations in commodity and factor market. Structural disequilibrium in balance of payments persists for relatively longer periods; as it is not easy to remove structural imbalance in the economy.

Some of the important causes of structural disequilibrium are as follows :-

  1. If the foreign demand for a country's products decline due to the discovery of cheaper substitutes abroad, then the country's export will decline causing a deficit.
  2. If the supply position of a country is affected due factors like crop failure, shortage of raw-materials, strikes, political instability, etc, then there would be the deficit in the balance of payments.
  3. A shift in demand due to the changes in tastes, fashions, income, etc, would increase or decrease the demand for imported goods causing a disequilibrium in the balance of payments.
  4. Changes in the rate of international capital movements may also cause structural disequilibrium.
  5. A war also results in structural changes which may affect not only goods but also factor of production causing a disequilibrium in balance of payments.

square 2. Cyclical Disequilibrium

When disequilibrium is caused due to the changes in trade cycles, it is termed as cyclical disequilibrium. It is possible that different phases of trade cycles like depression, prosperity, boom, recession, etc, may disturb terms of trade and cause disequilibrium in balance of payments.

For instance, during boom period, imports may increase considerably due to increase in demand for imported goods. During recession and depression, imports may be reduced due to fall in demand on account of reduced income. During recession exports may increase due to fall in price. During boom period, a country may face deficit in its BoP position on account increase in imports. However, during recession its export may increase, and as such BoP position may show surplus.

Also, the importing countries may face cyclical changes. For instance, there may be recession in the importing countries, which in turn would reduce demand for imports. Therefore, the demand for exports will decline and the exporting country may face a trade deficit, which in turn may affect BoP positions.

square 3. Technological Disequilibrium

Technological disequilibrium in balance of payments is caused by various technological changes involve inventions or innovations of new goods or new technique of production. These technological changes affect the demand for factors and goods.

A technological change will give comparative advantage to the innovating country leading to the increase in exports or a decline in imports. This will create disequilibrium in the balance of payments.

square 4. Short run Disequilibrium

Disequilibrium caused on a temporary basis for a short period, say one year is called short run disequilibrium. Such disequilibrium does not pose a serious threat as it can be overcome within a short run. Such an disequilibrium may be caused due to international borrowing and lending. When a country goes for borrowing or lending it leads to short run disequilibrium. Such disequilibrium is justified as they do not pose a serious threat.

Short run disequilibrium may also be caused when a country's imports exceeds exports in a particular year. Such disequilibrium is not justified as it has the potentiality to develop in to a crisis in time. The crisis in India in 1990-91 is nothing but the development of short run disequilibrium. If the short run disequilibrium is persistant & occurs repeatedly; it may pave the way for long run disequilibrium.

square 5. Long run or Secular Disequilibrium

It prevails for a long period of time i.e. when the disequilibrium is persistent & long run oriented, it is called long run disequilibrium The IMF terms such disequilibrium as "Fundamental Disequilibrium".

Long-run or fundamental disequilibrium refers to a persistent deficit or a surplus in the balance of payments of a country. It is also known as secular disequilibrium.

When there is a continuous increase in the stock of gold and foreign exchange reserves. there is a persistent surplus & vise-versa.

Permanent changes in the conditions of demand and supply of exports and imports cause fundamental disequilibrium. A permanent deficit or surplus may make a country debtor or creditor causing a fundamental disequilibrium.

A developing country in its initial stages may import large amount of capital & hence its imports would exceeds exports. When this becomes chronic, there emerges a secular deficit in its balance of payments. Deep rooted dynamic changes like capital formation, innovations. technological advancements, growth of population etc. also contribute to fundamental disequilibrium.

When there is a series of short-run disequilibrium in a country's balance of payments, ultimately it would lead to fundamental disequilibrium.

square 6. Monetary Disequilibrium

Monetary disequilibrium, takes place on account of inflation or deflation. Due to inflation. the prices of the products in the domestic market rises, and therefore, export items will become expensive. Such a situation may affect the BoP equilibrium. Inflation also results in to increase in money income with the people, which in turn may increase demand for imported goods. As a result imports may turn Bop position in disequilibrium.

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