B.O.P DISEQUILIBRIUM

Occurs when: Disequilibrium Demand ≠ Supply Debit > Credit → Deficit International Economics Favourable BoP When receipts exceed payments, the BoP is said to be favourable. That is, R / P > . Unfavourable BOP When receipts are less than payments, the BoP is said to be unfavourable or adverse.That is R / P < . .

. . Types BOP Disequilibrium: There are three main types of BOP Disequilibrium, which are discussed below. (a) Cyclical Disequilibrium, (b) Secular Disequilibrium, (c) Structural Disequilibrium.

a) Cyclical Disequilibrium: Cyclical disequilibrium occurs because of two reasons. First, two countries may be passing through different phases of business cycle. Secondly, the elasticities of demand may differ between countries. b) Secular Disequilibrium: The secular or long-run disequilibrium in BOP occurs because of long-run and deep seated changes in an economy as it advances from one stage of growth to another.

In the initial stages of development, domestic investment exceeds domestic savings and imports exceed exports, as it happens in India since . c) Structural Disequilibrium: Structural changes in the economy may also cause balance of payments disequilibrium. Such structural changes include development of alternative sources of supply, development of better substitutes, exhaustion of productive resources or changes in transport routes and costs. .

. . Causes for BoP Disequilibrium The following are the major causes producing disequilibrium in the balance of payments of a country. .

Cyclical Fluctuation: Cyclical disequilibrium in different countries is caused by their cyclical fluctuations, their phases and magnitude. World trade shrinks during depression while trade flourishes during prosperity . Structural Changes: Structural disequilibrium is caused by the structural changes brought by huge development and investment programmes in the developing economies. Such economies may have high propensity to import for want of capital for rapid industrialization, while export may not be boosted up to that extent.

. Development Expenditure: 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. Income, savings and investment are abysmally low.

They depend upon developed countries for import of commodities, capital and technology. Export potential is low and import intensity is high. So the LDCs suffer from adverse BoP. International Economics .

Consumerism: Balance of payments position of a country is adversely affected by a huge increase in consumption. This increases the need for imports and decreases the capacity to export. . Demonstration Effect: Deficit in the balance of payments of developing countries is also caused by demonstration effect which influences the people in UDCs to imitate western styled goods.

This will raise the propensity to import causing adverse balance of payments. This is good for the developed countries.