Causes and Measures of

Disequilibrium (Balance of
Payment)
Causes and Measures of Disequilibrium!
Overall account of BOP is always in equilibrium. This balance or
equilibrium is only in accounting sense because deficit or surplus
is restored with the help of capital account.

In fact, when we talk of disequilibrium, it refers to current

account of balance of payment. If autonomous receipts are less
than autonomous payments, the balance of payment is in deficit
reflecting disequilibrium in balance of payment.

1. Causes of disequilibrium in BOP:

There are several factors which cause disequilibrium in the BOP
indicating either surplus or deficit.

Such causes for disequilibrium in BOP are listed below:

(i) Economic Factors:
(a) Imbalance between exports and imports. (It is the main cause
of disequilibrium in BOR), (b) Large scale development
expenditure which causes large imports, (c) High domestic prices
which lead to imports, (d) Cyclical fluctuations (like recession or
depression) in general business activity, (e) New sources of
supply and new substitutes.

(ii) Political Factors:

Experience shows that political instability and disturbances cause
large capital outflows and hinder Inflows of foreign capital.

(iii) Social Factors:

(a) Changes in fashions, tastes and preferences of the people
bring disequilibrium in BOP by influencing imports and exports;
(b) High population growth in poor countries adversely affects
their BOP because it increases the needs of the countries for
imports and decreases their capacity to export.
Types of Disequilibrium in Balance of Payments

Broadly speaking, there are 5 main types of disequilibrium in

the BOP:

1. Cyclical Disequilibrium.
2. Secular Disequilibrium.
3. Structural Disequilibrium.
4. Temporary Disequilibrium.
5. Fundamental Disequilibrium.
1. Cyclical Disequilibrium

in the BOP arises due to the influences of cyclical fluctuations.

Cyclical Disequilibrium in the BOP in the occur, because:

1. Business cycle/Trade cycle follow different paths and

patterns in different countries.
2. There are no identical timing and periodicity of occurrence of
cycles in different nations.
3. No identical stabilization programs and measures are
adopted by different states.
4. Income Elasticities of demand for import in different nations
are not identical.
5. Price Elasticities of demand for imports differ in different
nations. Deficit and surplus alternatively take place during
depression and prosperity phase of a cycle. The BALANCE
OF PAYMENTS Equilibrium is automatically set forth over
the complete cycle.
2. Secular Disequilibrium

Secular disequilibrium in the balance of payments is a long-term,

phenomenon, caused by persistent, deep-rooted dynamic
changes which slowly take place in the economy over a long
period of time.

It may be caused by changes in several dynamic forces or factors

such as capital formation, population growth, technological
changes, the growth of markets, changes in resources, etc a
newly developing nation, For instance, needs huge Investments
which far exceed exports. It’s domestic savings. Its imports also
tend to exceed exports.

If sufficient foreign capital is not forthcoming it may suffer from a

secular deficit in its Balance of payments. On the contrary, a
mature economy may have surplus capital and a
favorable balance of trade.

If the outflow of capital is sufficient or restricted, a secular surplus

in the balance of payments may accrue to the country.

 12 Methods to Correct Disequilibrium in Balance of Payments (Step-by-Step)

 13 Causes of Disequilibrium in the Balance of Payments (Step-by-Step)

3. Structural Disequilibrium

Structural disequilibrium arises from structural changes occurring

in few sectors of the economy at home or abroad which may alter
the demand for supply conditions for exports or imports or both.

A change in foreign demand for exports can arise from a change

in technology, the invention of the cheaper substitute.

Similarly, a change in supply can arise from the dislocation of

production because of strikes or other political punches or natural
calamities. Service income from abroad may also decline
because of a change in the economic situation or the economic
policy of other Nations.

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Examples)

Structural changes are also produced by variation in the rate of

international capital movement. Structural disequilibrium at the
factor level takes place when a country’s factor prices deviate
disproportionately the factor endowment.
4. Temporary Disequilibrium

In a country’s Balance of payments is of a temporary nature

lasting for a short period which may occur once in a while.

Any factor which temporarily causes one-sided movement in the

items constituting the Balance of payments is sufficient to cause
a disequilibrium. This is subject to reversal within a limited period.
5. Fundamental or Long Run Disequilibrium

The long-term disequilibrium thus refers to a deep-rooted,

persistent deficit or surplus in the Balance of payments of a
country.

It is a secular disequilibrium emerging on account of the

chronologically accumulated short-term disequilibrium deficit or
surpluses.

It endangers the exchange stability of the country concerned.

Especially, a long-Run deficit in the Balance of payments of a

country tends to deplete its Foreign Exchange Reserves and the
country may also be unable to raise any more loans from
foreigners on account of such persistent deficits.

A Fundamental equilibrium is said to exist when autonomous

income and expenditure accord with each other over a given
period without either necessitating import restrictions or causing
excessive unemployment.

In practice, it is difficult to determine whether these criteria are

fulfilled.

The underdeveloped Nations generally suffer from long-term

disequilibrium in the Balance of payments owing to a large
number of causes and many Complex factors interacting with one
another. The root cause of disequilibrium in the Balance of
payments of this Economics is the huge development and
investment programmes in operation in this economics.
They require Import of Huge quantities of capital goods, technical
know-how an essential raw material to carry on the development
programmes.

2. Measures to correct disequilibrium in BOP:

Sustained or prolonged deficit has to be settled by short term
loans or depletion of capital reserve of foreign exchange and gold.

Following remedial measures are recommended:

(i) Export promotion:
Exports should be encouraged by granting various bounties to
manufacturers and exporters. At the same time, imports should
be discouraged by undertaking import substitution and imposing
reasonable tariffs.

(ii) Import:
Restrictions and Import Substitution are other measures of
correcting disequilibrium.

(iii) Reducing inflation:

Inflation (continuous rise in prices) discourages exports and
encourages imports. Therefore, government should check
inflation and lower the prices in the country.

(iv) Exchange control:

Government should control foreign exchange by ordering all
exporters to surrender their foreign exchange to the central bank
and then ration out among licensed importers.

(v) Devaluation of domestic currency:

It means fall in the external (exchange) value of domestic
currency in terms of a unit of foreign exchange which makes
domestic goods cheaper for the foreigners. Devaluation is done by
a government order when a country has adopted a fixed exchange
rate system. Care should be taken that devaluation should not
cause rise in internal price level.

(vi) Depreciation:
Like devaluation, depreciation leads to fall in external purchasing
power of home currency. Depreciation occurs in a free market
system wherein demand for foreign exchange far exceeds the
supply of foreign exchange in foreign exchange market of a
country (Mind, devaluation is done in fixed exchange rate
system.)