Disequilibrium in the Balance of Payments

A country's BOP is said to be in equilibrium when its total receipts from the rest of the world equal its total payments to the rest of the world over a period. In practice, this equality rarely holds exactly, and a country's BOP shows disequilibrium — either a deficit (payments exceed receipts) or a surplus (receipts exceed payments).

Causes of disequilibrium in BOP:

• Cyclical causes — trade cycles (booms and depressions) in the world economy affect a country's exports and imports differently at different times.
• Structural causes — a shift in demand or supply pattern, e.g. discovery of a cheaper substitute abroad reducing demand for a country's exports, or a change in the composition of a country's own production.
• Secular (long-term) causes — long-run changes in an economy, e.g. a developing economy typically needs heavy capital-goods imports to industrialise, which persistently pushes it towards deficit over many years.
• Population growth — a rapidly growing population raises the demand for imports (food, consumer goods) faster than domestic production or export capacity can grow.
• Natural calamities — a drought, flood or crop failure can force sudden additional imports (e.g. of foodgrains) and reduce exportable surplus.
• Change in demand — a change in tastes and fashions internationally can reduce demand for a country's traditional exports. …