A country can be in surplus or deficit in their balance of Payment accounts. This situation is called disequilibrium in Balance of Payment

1. Disequilibrium
in
Balance of Payment
By - Vijyata

2. Balance of Payment
● Balance of Payments (BOP) is a statistical
statement that systematically summarizes, for a
specified period of time, the monetary
transactions of an economy with the rest of the
world. BOP data help measure financial transactions
between residents of the country and residents of all
other countries.
2

3. Diseuilibrium in Balance of Payment
SRUPLUS
Supply of
foreign
currency
exceeds its
demands
3
DEFICIT
Demand of
foreign
currency
exceeds its
supply

4. Reasons for Diseuilibrium in Balance
of Payment
4
ECONOMIC
FACTOR
POLITICAL
FACTOR
SOCIOLOGICAL
FACTOR

5. ECONOMIC FACTORS
5
STRUCTURAL
DISEQUILIBRIUM
DEVELOPMENTAL
DISEQUILIBRIUM
CYCLICAL
DISEQUILIBRIUM
SECULAR
DISEQUILIBRIUM

6. DEVELOPMENTAL DISEQUILIBRIUM
6
Developing countries undertake heavy expenditure on the
development of industries, power plants, bridges, roads,
ports, hospitals, universities, etc. These developmental
activities require huge imports of machinery, equipment
and other capital goods. In addition, such developmental
activities increase income and demand and imports of
consumer goods. Large scale imports of capital goods and
consumer goods result in deficit in the balance of
payments.

7. CYCLICAL DISEQUILIBRIUM
7
Such disequilibrium arises due to fluctuations in imports
and exports caused by business cycles. The boom in
business activity in a country increases aggregate demand,
consumption and prices. The country imports more
consumer goods to meet the increase in demand. It also
increases imports of capital goods to expand production.
On the other hand, depression in a country leads to
increase in its exports because production exceeds home
demand. Thus, both boom and depression create
disequilibrium in the balance of payments.

8. SECULAR DISEQUILIBRIUM
8
Disequilibrium in a country's balance of payments persists
for long periods due to secular trends in its economy. In a
developed country like the United States, disposable
incomes and aggregate demand are generally very high. At
the same time, costs of production are high on account of
high wage rates. High costs result in higher prices.
Therefore, the country imports goods from other countries
where quality goods are produced at lower costs. Huge
imports creates a deficit in the balance of payments of even
a developed country like USA.

9. STRUCTURAL DISEQUILIBRIUM
9
Structural changes in the economy include shift from
agriculture to service sector, development of alternative
sources of supply development of better substitutes,
exhaustion of productive resources, changes in transport
routes and costs. These structural changes increase the
imports of both capital goods and consumer goods,
causing a deficit in the balance of payments.

10. POLITICAL DISEQUILIBRIUM
10
Political instability, civil war, riots, terrorism, external war
and such other political disturbances create a threat for
industry and investment. These factors may lead to large
capital outflows and decline in domestic production and
exports. Sri Lanka, Pakistan, Bangladesh and Nepal have
faced such a situation.

11. SOCIOLOGICAL DISEQUILIBRIUM
11
Changes in tastes, preferences, fashions may
affect imports and exports which in turn create
disequilibrium in the balance of payments.

12. MEASURES TO CORRECT BOP
DISEQUILIBRIUM
12
Correcting
Measures
Automatic
Measures
Deliberate
Measures
Monetary
Measures
Trade Measures
Import Control
Export Promotion
Miscellaneous
Measures
•Monetary Contraction or expansion
•Devaluation or revaluation
•Exchange control
•Import substitution
•Incentives for foreign investment
•Foreign Loans
•Development of tourism
Import Prohibition,
quotas & duties
Export incentives ,
subsidies & reduction
in export duties

13. Automatic correction
13
Here the assumption is that if the market forces of demand and supply are
allowed to play freely, in course of time, equilibrium in BOP will be
automatically achieved.
Suppose, India is facing deficit in its balance of payments. The
demand for foreign currency exceeds its supply. This will increase the
exchange rate and a fall in the external value of rupee. This will make
India's exports cheaper and its imports more costly. As a result the increase
in the country's exports and decrease in imports will ultimately restore
equilibrium in the balance of payments..

14. Deliberate Monetary Measures
14
i. Reduction/expansion of money supply: Deficit in balance of payments
can be corrected by reducing money supply in the economy. The country's
central bank (e.g., the Reserve Bank of India) reduces money supply
through techniques like bank rate, open market operation, Statutory
Liquidity Ratio (SLR), Cash Reserve Ratio (CRR), etc. Reduction in money
supply leads to a fall in domestic demand and prices. This in turn
increases exports and decreases imports thereby reducing the deficit.
Similarly, money supply ca be expanded to reduce surplus in the balance
of payments.

15. Deliberate Monetary Measures
15
ii. Devaluation: A country having considerable deficit in its balance of
payments e of Payment Account may devalue its currency to encourage
exports and discourage imports. Devaluation means reduction in the
official exchange rate of a currency. For example, Government of India
devalued the rupee from * 35 per US $ to 34.5 per US $.

16. Deliberate Monetary Measures
16
iii. Exchange Control: Under this method the Government or the country's
central bank exercises complete control over the foreign exchange reserves
and earnings of the country. The exporters are required to surrender foreign
exchange for the Reserve Bank of India in exchange in domestic currency.
Importers need prior permission of the Reserve Bank of India to use foreign
exchange. In this way, the Government controls the imports to reduce
deficit in the balance of payments.

17. Deliberate Trade Measures
17
- Export Promotion: A country may boost its exports by reducing or
abolishing export duties, providing export subsidy; encouraging export
promotion and marketing through monetary, fiscal, institutional and
physical incentives and facilities. For example, Government of India
offers liberal loans and other facilities to export-oriented units. It has
set up export processing zones.
- Import Control: Imports are controlled by imposing or increasing import
duties, fixing import quotas, import licensing, and prohibiting
altogether the imports of certain non-essential items.

18. Deliberate Miscellaneous Measures
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These include
 raising foreign currency loans,
 encouraging foreign investment in the home country
 developing tourism to attract foreign tourists, and
 giving incentives to encourage foreign remittances.

19. Thank you!!!