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International Trade and Finance Pavitar Parkash Singh, Lovely Professional University
Notes
Unit 12 : Equilibrium and Disequilibrium in BOP
CONTENTS
Objectives
Introduction
12.1 Equilibrium of Balance of Payments
12.2 Disequilibrium in Balance of Payments
12.3 Summary
12.4 Key-Words
12.5 Review Questions
12.6 Further Readings
Objectives
After reading this Unit students will be able to:
Explain Equilibrium of Balance of Payments.
Describe Disequilibrium in Balance of Payments.
Introduction
The main purpose of this unit is to arrive at definitions of balance of payments equilibrium sufficiently
precise to furnish policy-makers with meaningful guides. Recent Australian and New Zealand
experience, of relaxations in exchange controls followed by tighter controls and of experimental
monetary techniques, suggest an imperfect understanding not only of the concepts of equilibrium
and reserve adequacy but also of measures most suited to attain these ends. A restatement of the
factors involved in defining these concepts together with an appraisal of remedial measures for a
balance of payments disequilibrium is considered appropriate.
Disequilibrium in the balance, of payments can arise due to persistently one sided movement of one
or more than one trading terms. If, for instance, the total value of goods exported exceeds the total
value of the goods imported over a given period and this surplus is not offset by the debit balance on
invisible item, the country will have favorable balance of payments. Disequilibrium in the balance
arises when exports of a country fall short of imports because of decrease in production at home, due
to stiffer competition abroad or of an appreciation in the currency or fall of purchasing power of the
buyers in the foreign market.
When the imports remain unaffected or increase, then the country will also face deficit in her balance
on invisible items, the country will have disequilibrium in her balance of payments. Disequilibrium
in her balance of payments can also arise over a given period due to excessive imports not equalized
by exports of invisible items and if it is not offset by credit balance on visible items, the country will
face disequilibrium in her balance of payments.
12.1 Equilibrium of Balance of Payments
Definition and Explanation
The equilibrium of balance of international payment is a statement that takes into account the
debits and credits of a country on international account during a calendar year.
When a country has unfavorable or adverse balance of payments, it is regarded as herald of disaster
because the country by having deficit in her balance of payments either decreases her balances abroad
or increases her foreign debits. When it has favorable credit balance, it is considered that the country
138 LOVELY PROFESSIONAL UNIVERSITY
