Disequilibrium in Balance of Payment Notes for UGC-NET Examination (2024)

The balance of payments (BOP) of a nation records all economic dealings amongst the residents of that nation and the rest of the world in a given time period. A disequilibrium in the balance of payments refers to a situation where a country's total payments differ from its total receipts leading to an overall deficit or surplus. A country faces a deficit in its balance of payments when its total payments exceed its total receipts. A surplus balance of payments arises when a country's total receipts exceed its total payments.

Disequilibrium in balance of payments is a very interesting and very important topic to be studied in the UGC-NET Commerce examination. The learners are required to be studying this topic in detail.

In this article, the learners will be able to understand more about the disequilibrium in balance of payments, and all the related topics in depth.

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Balance of Payments Equilibrium Definition

Balance of payments equilibrium refers to a situation where a country's total payments (outflows) are equal to its total receipts (inflows) in the payments account. In simple terms, a country's balance of payments is in equilibrium when the below mentioned terms.

Total exports = Total imports

Total debit flows = Total credit flows

Total outward payments = Total inward payments

Balance of Payment Equilibrium

Disequilibrium in balance of payments refers to an imbalance where a country's total payments do not equal its total receipts. There are two types of disequilibrium.

• Balance of payments deficit - When a country's total payments exceed its total receipts. This means more money is flowing out of the country than coming in.
• Balance of payments surplus - When a country's total receipts exceed its total payments. Extra money is coming into the country than going out.

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Types of Disequilibrium in Balance of Payment

Balance of payments deficit-

• This occurs when a country's total payments exceed its total receipts. This means more money is flowing out of the country than coming in. A BOP deficit can occur due to the following.
• Higher imports than exports, leading to a trade deficit
• More outward investment and loan repayments than inward investment and loans
• Higher interest payments on foreign debt.
• More tourism spending abroad by residents than spending by foreign tourists in the country.
• A BOP deficit puts pressure on a country's foreign exchange reserves and currency value. The government may need to devalue the currency or raise interest rates to correct the deficit.

Balance of payments surplus-

• This happens when a country's total receipts exceed its total payments. Extra money is coming into the country than going out. A BOP surplus can occur due to the following.
• Higher exports than imports, creating a trade surplus
• More inward investment and loans than outward investment and loans
• Lower interest payments on foreign debts
• More tourism spending in the country by foreign tourists than spending abroad by residents.
• Though less problematic, a large BOP surplus can put appreciative pressure on the currency and lead to an overheating economy. The government may need to pursue policies to redistribute demand and reduce the surplus.

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Measure to Correct Disequilibrium in BOP

The measures taken to correct the disequilibrium in BOP can be better understood from the explanation below.

For a Deficit following are the facts are applicable.

• Devalue the currency - This makes exports cheaper and imports costlier, improving the trade balance. However, it can lead to higher inflation.
• Raise interest rates - This attracts more foreign capital inflows and reduces capital outflows, helping correct the deficit. But it can slow economic growth.
• Impose capital controls - Restricting capital outflows through rules and regulations can reduce the deficit. But it limits free capital movement.
• Subsidize exports - Providing subsidies and incentives to exporters can boost export earnings and correct the deficit. But it increases government spending.
• Restrict imports - Putting quotas, tariffs or bans on selected imports can reduce import spending and the deficit. But it limits consumer choices.

For a surplus the following are applicable.

• Appreciate the currency - This makes exports costly and imports cheaper, reducing the surplus. But it makes domestic goods uncompetitive internationally.
• Lower interest rates - This reduces capital inflows and increases outflows, correcting the surplus. But it can fuel inflation.
• Provide import subsidies - Subsidizing selected imports can boost import demand and reduce the surplus. However, it increases government spending.
• Impose export restrictions - Putting quotas or taxes on some exports can reduce export earnings and the surplus. But it limits industry growth.
• Also, read about EU Trade Agreements.

Also, read about EU Trade Agreements.

Conclusion

Disequilibrium in the Balance of Payments is not necessarily bad but persistent large deficits or surpluses are a concern and need correction. Deficits can be financed by foreign capital in the short run but too much foreign debt makes the economy vulnerable. Surpluses often mean losing the opportunity to trade and invest more with other countries. The disequilibrium can be corrected using policies like currency devaluation, trade policy measures, exchange control and demand management. These policies aim at promoting exports, reducing imports and controlling foreign capital flows. However, these policies also have their costs and limitations.

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