We all know that Foreign Currency is the backbone of a country’s economic relations with other countries. The balance of payments of a country is said to be in equilibrium when the demand for foreign exchange in exactly equivalent to the supply of it. The balance of payments is regarded as being in disequilibrium when it shows either a surplus or a deficit.
There will be a deficit in the balance of payments when the demand for foreign exchange exceeds its supply, and three will be a surplus when the supply of foreign exchange exceeds the demand. A number of factors may cause disequilibrium in the balance of payments. Here is a brief information about some of them, so that you have a clear idea:
Large Development Expenditures:
The direct impact of the large scale development expenditures is seen in increase the purchasing power, aggregate demand and prices. This results in substantially large imports. This phenomenon is common in the developing countries, because the above factors and the large scale import of capital goods needed for carrying out the various development programmes give rise to a deficit in their balance of payments.
Cyclical fluctuations in the business activity bring depression, stagnant and boom stage in world trade. Whenever a country is in boom, it will ordinary experience a more repaid growth in its imports than in its exports, while the opposite will be true in case of recession. This means that the exports (comparing to imports) growth is more in case of recession.
The sustained or secular disequilibrium refers to a situation when, the BoP disequilibrium persists for long periods due to certain secular trends in the economy. It is seen in the developed countries where, the disposable income is generally very high and so the aggregate demand is also very high. But due to the higher aggregate demands, the production costs are also very high. This would result in higher prices, which may result in the imports being much higher than the exports.
Structural Disequilibrium occurs due to changes in the structure of the trade. This may include the development of alternative source of supply, development of better substitutes, exhaustion of productive resources or change in transport routes and costs.
A country with political instability may experience large capital outflow and inadequacy of domestic investment and production.