Page 207 - DECO201_MACRO_ECONOMICS_ENGLISH

Macro Economics

Notes (c) Net Liquidity Balance: It includes the basic balance plus the short-term private non-liquid
capital balance.
(d) Official Settlement Balance: It is the total of the net liquidity balance plus the short-term
private non-liquid capital balance.
An analytical approach is to consider the balance of payments as the difference between receipts
from and payments to foreigners by the residents of a country. Thus,
B = R—P
Where, B= Balance of payments, R= Receipts and P = Payments
If B = O, BP is an equilibrium
If B = (+), BP is surplus (BP is balance of payments)
If B = (-), BP is in deficit

Task Try to find out the current account, capital account and Official Reserve Account
balances of any one developed and one under developed country.

12.1.2 Types of Equilibrium

Equilibrium is that state of the balance of payments over the relevant period of time which
makes it possible to sustain an open economy without severe unemployment on a continuing
basis. There are two types of equilibrium:
Static Equilibrium: It is one in which the exports equal imports including exports and imports of
services as well as goods, and other items on the balance of payments such as short-term capital,
long-term capital and monetary gold are in balance zero.
Dynamic Equilibrium: The condition of equilibrium for short periods of time is that exports and
imports differ by the amount of short-term capital movements of gold and there are no large
destablishing short-term capital movements.

12.1.3 Types of Disequilibrium

There are three main types of disequilibrium:
1. Cyclical Disequilibrium: This is caused by countries having different cyclical patterns of
income or the same income pattern with different income elasticities or identical income
patterns and income elasticities with different price elasticities.
2. Secular Disequilibrium: This is a long-term phenomenon. It is caused by persistent deep
rooted dynamic that slowly takes place in the economy over a long period of time. Secular
disequilibrium is caused by dynamic forces such as population growth, territorial expansion
and technological development.
Technological changes are another major cause of disequilibrium in the balance of
payments. Each technological change implies a new comparative advantage which other
country adjusts but the adjustment process itself produces a balance of payment deficit.
3. Structural Disequilibrium: It occurs on account of structural changes in some sectors of the
economy at home or abroad which may alter demand or supply relations of exports on
imports or both. Structural disequilibrium at factor level results from factor prices that
fail to reflect accurately factor adjustments.

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