Page 151 - DECO503_INTERNATIONAL_TRADE_AND_FINANCE_ENGLISH

Unit 12 : Equilibrium and Disequilibrium in BOP

Causes of Disequilibrium in Balance of Payment Notes
1. Population Growth
Most countries experience an increase in the population and in some like India and China the
population is not only large but increases at a faster rate. To meet their needs, imports become
essential and the quantity of imports may increase as population increases.
2. Development Programmes
Developing countries which have embarked upon planned development programmes require
to import capital goods, some raw materials which are not available at home and highly skilled
and specialized manpower. Since development is a continuous process, imports of these items
continue for the long time landing these countries in a balance of payment deficit.
3. Demonstration Effect
When the people in the less developed countries imitate the consumption pattern of the people
in the developed countries, their import will increase. Their export may remain constant or
decline causing disequilibrium in the balance of payments.
4. Natural Factors
Natural calamities such as the failure of rains or the coming floods may easily cause
disequilibrium in the balance of payments by adversely affecting agriculture and industrial
production in the country. The exports may decline while the imports may go up causing a
discrepancy in the country’s balance of payments.
5. Cyclical Fluctuations
Business fluctuations introduced by the operations of the trade cycles may also cause
disequilibrium in the country’s balance of payments. For example, if there occurs a business
recession in foreign countries, it may easily cause a fall in the exports and exchange earning of
the country concerned, resulting in a disequilibrium in the balance of payments.
6. Inflation
An increase in income and price level owing to rapid economic development in developing
countries, will increase imports and reduce exports causing a deficit in balance of payments.
7. Poor Marketing Strategies
The superior marketing of the developed countries have increased their surplus. The poor
marketing facilities of the developing countries have pushed them into huge deficits.
8. Flight of Capital
Due to speculative reasons, countries may lose foreign exchange or gold stocks People in
developing countries may also shift their capital to developed countries to safeguard against
political uncertainties. These capital movements adversely affect the balance of payments
position.
9. Globalisation
Due to globalisation there has been more liberal and open atmosphere for international
movement of goods, services and capital. Competition has beer increased due to the globalisation
of international economic relations. The emerging new global economic order has brought in
certain problems for some countries which have resulted in the balance of payments
disequilibrium.
Types of BOP Disequilibrium

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

LOVELY PROFESSIONAL UNIVERSITY 145