Types of BOP Disequilibrium

.
TYPES OF DISEQUILIBRIUM IN BOP

1. STRUCTURAL DISEQUILIBRIUM
 Structural disequilibrium is caused by structural changes
in the economy affecting demand and supply relations in
commodity and factor markets. Some of the structural
disequilibrium are as follows :-
 a. A shift in demand due to changes in tastes, fashions,
income etc. would decrease or increase the demand for
imported goods thereby causing a disequilibrium in BOP.
 b. If foreign demand for a country's products declines
due to new and cheaper substitutes abroad, then the
country's exports will decline causing a deficit.
 c. Changes in the rate of international capital
movements may also cause structural disequilibrium.
 d.If supply is affected due to crop failure, shortage of
raw-materials, strikes, political instability etc., then
there would be deficit in BOP.
 e.A war or natural calamities also result in structural
changes which may affect not only goods but also
factors of production causing disequilibrium in BOP.
 f. Institutional changes that take place within and
outside the country may result in BOP
disequilibrium.
For Eg.if a trading block imposes additional import
duties on products imported in member countries
of the block, then the exports of exporting
country would be restricted or reduced. This may
worsen the BOP position of exporting country
2. CYCLICAL DISEQUILIBRIUM
 Economic activities are subject to business cycles, which
normally have four phases Boom or Prosperity, Recession,
Depression and Recovery.
During boom period, imports may increase considerably
due to increase in demand for imported goods.
 During recession and depression, imports may be reduced
due to fall in demand on account of reduced income.
 During recession exports may increase due to fall in
prices. During boom period, a country may face deficit in
BOP on account of increased imports.
 Cyclical disequilibrium in BOP may occur
because
 a. Trade cycles follow different paths and
patterns in different countries.
 b. Income elasticity of demand for imports in
different countries are not identical.
 c. Price elasticity of demand for imports differ
in different countries
3. SHORT - RUN DISEQUILIBRIUM :-
 This disequilibrium occurs for a short period of one

or two years. Such BOP disequilibrium is
temporary in nature.
 Short - run disequilibrium arises due to unexpected
contingencies like failure of rains or favourable
monsoons, strikes, industrial peace or unrest etc.
 Imports may increase exports or exports may
increase imports in a year due to these reasons and
causes a temporary disequilibrium exists.
 International borrowing or lending for a short -
period would cause short - run disequilibrium in
balance of payments of a country.
Short term disequilibrium can be corrected
through short - term borrowings. If short - run
disequilibrium occurs repeatedly it may pave way
for long - run disequilibrium.
4. LONG - RUN SECULAR DISEQUILIBRIUM :-
 Long run or fundamental disequilibrium refers to a persistent deficit or

a surplus in the balance of payments of a country. It is also known as
secular disequilibrium. The causes of long - term disequilibrium are
 a. Continuous increase in demand for imports due to increasing
population.
 b. Constant price changes - mostly inflation which affects exports on
continuous basis.
 c. Decline in demand for exports due to technological improvements in
importing countries, and as
 such the importing countries depend less on imports.
 The long run disequilibrium can be corrected by making constant
efforts to increase exports and to reduce imports.
5. MONETARY DISEQUILIBRIUM
 Monetary disequilibrium takes place on account

of inflation or deflation. Due to inflation, prices of
products in domestic market rises, which makes
exports expensive. Such a situation may affect
BOP equilibrium.
 Inflation also results in increase in money income
with people, which in turn may increase demand
for imported goods. As a result imports may turn
BOP position in disequilibrium.
6. EXCHANGE RATE FLUCTUATIONS :-
 A high degree of fluctuation in exchange rate may affect

the BOP position. For Eg.if Indian Rupee gets
appreciated against dollar, then Indian exporters will
receive lower amounts of foreign exchange, whereas,
there will be more outflow of foreign exchange on
account of higher imports.
 Such a situation will adversely affect BOP position. But,
if domestic currency depreciates against foreign
currency, then the BOP position may have positive
impact

Types of BOP Disequilibrium

Uploaded by

Copyright:

Available Formats

Types of BOP Disequilibrium

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Types of BOP Disequilibrium

Uploaded by

Copyright:

Available Formats

.

TYPES OF DISEQUILIBRIUM IN BOP

 This disequilibrium occurs for a short period of one

 Long run or fundamental disequilibrium refers to a persistent deficit or

 Monetary disequilibrium takes place on account

 A high degree of fluctuation in exchange rate may affect

You might also like