Page 208 - DECO201_MACRO_ECONOMICS_ENGLISH

Unit 12: Balance of Payments

Transitory and Fundamental Disequilibrium Notes

Transitory or temporary disequilibrium is purely temporary and self-correcting. It does not
involve the complex problem of adjustment.
Disequilibrium is fundamental if it progressively deteriorates and if it is a chronic long-term
problem. It requires correction and adjustment. However, there is no one clear test for
fundamental disequilibrium.

Self Assessment

Multiple Choice Questions:
1. Which of these is not included in the current account of BOP?
(a) Expenditure on tourism (b) Expenditure on defence
(c) Investment income (d) Government lendings
2. Maturity period for short-term investments is ..............................

(a) Less than one year (b) Two years
(c) Three years (d) Five years
3. BOP must always be equal to:

(a) 0 (b) 1
(c) GDP (d) Government spending
4. ...........................balance includes the basic balance plus the short-term private non-liquid
capital balance.
(a) Current account (b) Basic
(c) Net liquidity (d) Official settlement
5. ................................. disequilibrium is caused by persistent deep rooted dynamic that slowly
takes place in the economy over a long period of time.
(a) Cyclical (b) Secular
(c) Structural (d) Fundamental

12.2 Factors Responsible for Imbalances in BOP

The following factors are responsible for imbalances in BOP:
1. Short-term disturbances like floods, crop failures, drought and so on may raise imports
and reduce exports.

2. Increase in income may lead to more imports and less exports.
3. Initiation of development plans may necessitate more imports, while exports of raw
materials may be curtailed.

4. While the prices of imports are rising for Least Developed Countries (LDCs), the prices of
exports are almost sticky.
5. Exports of a country may reduce due to (a) contraction of the economy, (b) government
policy, (c) reduction in exportable surplus, (d) higher home consumption, (e) circulation
of better quality and new goods, (f) increase in income.

LOVELY PROFESSIONAL UNIVERSITY 203