The document discusses the meaning, components, and types of disequilibrium in the balance of payments (BOP) of a country. It defines BOP as a systematic record of monetary transactions between a country and the rest of the world. The key components are the current account, capital account, and reserve account. Disequilibrium can be cyclical, structural, fundamental, or monetary in nature and can be corrected through measures like deflation, devaluation, and various trade restrictions.

1. SARATH SHAJI, POST GRADUATE DEPARTMENT OF COMMERCE ST.STEPHENS COLLEGE,UZHAVOOR

2. MEANING
It is a systematic statement that systematically summarizes, for a
specified period of time, the monetary transactions of an economy with
the rest of the world. The Bop includes both visible and invisible
transactions

3. MEANING
• The Bop account may be in surplus or deficit
• A deficit Bop leads to fall or deprecation in the value home currency –
mean demand for foreign currency increase
• While the surplus strengthen the domestic currency – means demand
for domestic currency increase.

4. COMPONENTS OF BOP
BOP
Current Account Capital Account Reserve account
Net errors and omission
account

5. Current Account
Current Account
Balance of Trade
Balance of
Invisible

6. Current Account ---- BoT
• It is the difference between merchandise export and merchandise import
• It is also called as “general merchandise”
• It record Export and Imports by resident with non resident.

7. Current Account --- BoI
• It record net balance of all transactions from intangibles like
• Service– legal consulting fee, royalty, tourist expenditure
• Investment income – interest, dividend other foreign investment
• Unilateral transfer– unrequired payments like foreign aids

8. Current Account
If the debit exceed credit then country Is running trade
deficit or other wise trade surplus

10. Balance of Trade (BoT) Balance of Payment (BOP)
Difference between export and import of goods only Include goods and invisibles and capital acount
BOT = Export - Import BoP = BOT +( net invisibles + net capital account)
Favorability of BoT is determined by export and import BoP will be favorable only when it have surplus in current
account and capital account
It need not be balance always It has to be in balance.
Main factor affect BOT–
Cost of production
Availability of raw materials
Exchange rate etc.
Factors affecting conditions of foreigners
Economic policy
All other factors of Bot

11. Capital Account
• It record the capital inflow and outflow or transaction in the exchange of financial assest it is also
called financial account
• The account consist of two component
 Capital account, and
 Financial account
Capital account– it is made up of transfer of financial assets and the acquisition and disposal of non
produced/ non financial assets.
Financial Account --- it shall consisted of three components direct investment, portfolio investment,
other investment like bank deposit, currency investment, trade credit.

12. Official Reserve Account
 The official reserve account is a part of the capital account, is the foreign currency and securities
held by the central bank of a country and used to balance the payments from year-to-year.
 The reserves increase in case of a trade surplus and decrease when there is a trade deficit. The
central banks use it to change the exchange rate to what the government perceives as more
favorable.
 The difference between the current account and the capital account of a country is reflected in
the change in the foreign exchange reserves of that country

13. Net error and omissions Account
 In principle, the debit and credit should be equal this does not happen due to error and omission in
the individual components of the BoP account.
 The net effects of these error and omission are entered as unrecorded transactions
 So, error and omission account is used to account for statistical error and or untraceable money
within the country.

14. Disequilibrium in the BOP
• BoP is a double entry accounting record, then apart from error and
omissions, it must always balance.
• The BoP deficit or surpus indicate the imbalance in the BoP
• The imbalance is interpreted as BoP dieequilibrium
• A countrys BoP is said to be in disequilibrium when its
autonomous receipts are not equal with its payments

15. Type of Disequilibrium –
Cyclical Disequilibrium
 It occurs on account of trade cycles. Depending upon the different phases of trade cycles
like prosperity and depression, demand and other forces vary, causing changes in the terms
of trade as well as growth of trade and accordingly a surplus or deficit will result in the
balance of payments.
 It occurs due to
i. Trade cycles follow different paths and patterns in different countries. There are no identical
timings and periodicity of occurrence of cycles in different countries.
ii. No identical stabilisation programmes and measures are adopted by different countries.
iii. Income elasticities of demand for imports in different countries are not identical.
iv. Price elasticities of demand for imports differ in different countries.

16. Structural Disequilibrium
It emerges on account of structural changes occurring in some
sectors of the economy at home or abroad which may alter the
demand or supply relations of exports or imports or both.
This type of disequilibrium occur due to change in
1. capital formation,
2. technological; changes
3. growth of population
4. extension of market

17. Fundamental Disequilibrium
 If deficit in BoP continue for a long period it is called fundamental
disequilibrium. It indicate a persistent
disequilibrium in BOP. Devaluation is the remedy to correct it
 It is also called Long run or Secular Disequilibrium

18. Monetary Disequilibrium
Monetary disequilibrium, takes place on account of inflation or deflation. Due to
inflation. the prices of the products in the domestic market rises, and therefore,
export items will become expensive. Such a situation may affect the BoP
equilibrium. Inflation also results in to increase in money income with the people,
which in turn may increase demand for imported goods. As a result imports may
turn Bop position in disequilibrium.

19. Short run disequilibrium
Disequilibrium caused on a temporary basis for a short period, say one year is called short run
disequilibrium. Such disequilibrium does not pose a serious threat as it can be overcome within a short
run. Such an disequilibrium may be caused due to international borrowing and lending. When a
country goes for borrowing or lending it leads to short run disequilibrium. Such disequilibrium is
justified as they do not pose a serious threat.
Short run disequilibrium may also be caused when a country's imports exceeds exports in a particular
year. Such disequilibrium is not justified as it has the potentiality to develop in to a crisis in time. The
crisis in India in 1990-91 is nothing but the development of short run disequilibrium. If the short run
disequilibrium is persistant & occurs repeatedly; it may pave the way for long run disequilibrium.

20. Causes of disequilibrium
 Development scheme – via it import increase but export falls OBOR
 Developments within the country – political instability
 Cost price structure – cost of production like labor
 Fall in export demand
 Growth of population
 Developments abroad

21. Correction of disequilibrium
 Deflation
 Devaluation
 Trade restrictions
a. Tariffs
b. Export subsidies
c. Commercial agreements
d. Import quotas
e. Import prohibitions