For College Students

1. International Economics
B.COM SEM-V
UNIT-II

2. AUTOMATIC ADJUSTMENT
IN THE
BALANCE OF PAYMENTS

3. Introduction
• Normally the balance of transactions is always
balanced but there is an imbalance due to unexpected
changes in the country. Here are the views of different
economists that such an imbalance is automatically
eliminated. Thus, classical and Keynesian economists
believe that if the economy is not under external
pressure or control, the balance of payments is
automatically balanced and this automatic adjustment is
based on two things: (1) price and (2) income. Thus
automatic adjustment, according to the classical view,
is “ brought about through price changes, while
according to Keynes and other writers, it is brought
about through income changes.

4. Automatic Adjustment through
Price Changes
• David Ricardo ,David Hume and other
classical writers held the view that automatic
adjustment in the balance of payments of a
country was brought through price changes.
According to them, under the international
gold standard mechanism, disequilibrium in
the balance payments was automatically
corrected through free movements of gold.

5. Automatic Adjustment through
Price Changes
India England
Import > Export Import < Export
BOP is in deficit BOP is in Surplus
Export of gold Import of gold
Decrease supply of money Increase supply of money
Decrease Price level Increase Price level
Decrease price of exports Increase price of exports
Increase Exports Increase imports
BOP will be in Balance BOP will be in Balance

6. Automatic Adjustment through
Income Changes
• According to Keynes and other Writers, automatic
adjustment in the balance of payments of a
country is brought about not through price
changes but through income changes. The
incomes of the different sectors of the economy of
a country are inter dependent on each other. Thus
for example, incomes in the industrial sector are
dependent on the agricultural sector; likewise
income from foreign trade affects agricultural and
industrial incomes.

7. Automatic Adjustment through
Income Changes
India England
Import > Export Import < Export
BOP is in deficit BOP is in Surplus
Decrease exports Increase exports
Decrease income of other sectors Increase income of other sectors
Decrease Purchasing power Increase Purchasing power
Decrease imports Increase imports
BOP will be in Balance BOP will be in Balance

8. THANK YOU
PREPARED BY
DR.JAGDISH MAHESHWARI
ASSISTANT PROFESSOR,
TOLANI INSTITUTE OF COMMERCE,ADIPUR