Page 152 - DECO503_INTERNATIONAL_TRADE_AND_FINANCE_ENGLISH

International Trade and Finance

Notes (a) Cyclical Disequilibrium : Cyclical disequilibrium occurs because of two reasons. First two
countries may be passing through different paths of business cycle. Second, the countries may be following
the same path but the income elasticities of demand or price elasticities of demand are different. If prices
rise in prosperity and decline in depression, a country with a price elasticity for imports greater
than unity will experience a tendency for decline in the value of imports in prosperity; while
those for which import price elasticity is less than one will experience a tendency for increase.
(These tendencies may be overshadowed by the effects of income changes, of course. Conversely,
as prices decline in depression, the elastic demand will bring about an increase in imports, the
inelastic demand a decrease.)
(b) Secular Disequilibrium : The secular or long-run disequilibrium in BOP occur because of long-run
and deep seated changes is an economy as it advances from one stage of growth to another. (The current
account follows a varying pattern from one state to another. In the initial stages of development,
domestic investment exceeds domestic savings and imports exceed exports.
Disequilibrium arises owing to lack of sufficient funds available to finance the import surplus,
or the import surplus is not covered by available capital from abroad. Then comes a stage when
domestic savings tend to exceed domestic investment and exports outrun imports.
Disequilibrium may result, because the long-term capital outflow falls short of the surplus
savings or because surplus savings exceed the amount of investment opportunities abroad. At
a still later stage, domestic savings tend to equal domestic investment and long term capital
movements are on balance, zero.)
(c) Structural Disequilibrium : Structural disequilibrium can be further bifurcated into :
(i) Structural Disequilibrium at Goods Level : Structural disequilibrium at goods level occurs
when a change in demand or supply of exports or imports alters a previously existing equilibrium,
or when a change occurs in the basic circumstances under which income is earned or spent abroad,
in both cases without the requisite parallel changes elsewhere in the economy. (Suppose the demand
for Pakistani handicrafts falls off. The resources engaged in the production of these
handicrafts must shift to some other line or the country must restrict imports, otherwise
the country will experience a structural disequilibrium.
A deficit arising from a structural change can be filled by increased production or decreased
expenditure, which in turn affect international transactions in increased exports or
decreased imports. Actually it is not so easy, because the resources are relatively immobile
and expenditure not readily compressible. Disinflation or depreciation may be called for
to correct a serious disequilibrium.)
(ii) Structural Disequilibrium at Factors Level : Structural disequilibrium at the factor level
results from factor prices which fall to reflect accurately factor endowments, i.e., when factor prices
are out of line with factor endowments, distort the structure of production from the allocation of
resources which appropriate factor prices would have indicated. If, for instance, the price of
labour is too high, it will be used more sparingly and the country will import goods with
a higher labour content. This will lead to unemployment, upsetting the balance in the
economy.
Self-Assessment

1. Choose the correct options:
(i) Which of the following would be one of the results associated with the use of freely floating
foreign exchange rates to correct a nation's balance of payments surplus?
(a) The nation's terms of trade with other nations would be worsened.
(b) Importers in the nation who had made contracts for the future delivery of goods would
find that they had to pay a higher price than expected for the goods.
(c) If the nation were at full employment, the decrease in exports and the increase in imports
would be inflationary.
(d) Exporters in the nation would find their sales abroad had decreased.

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