Contents:
Causes of Unfavourable Balance of Payment
1. More demand of consumption goods
2. Price Disequilibrium
3. Foreign Competition
4. Less growth in exports
5. Population explosion
Measures to correct disequilibrium in the Balance of Payments
1. Promotion of Exports
2. Increase in Production
3. Trade Agreement
4. Encouragement of foreign investment
5. Attraction to foreign tourists
6. Devaluation of Indian Currency
Balance of Payment
Introduction:
It is a systematic pattern to record all trade and capital inflows and outflows from a country in the balance of payment statement. Thus, the balance of payment (BOP) is a systematic record of a country’s all economic transactions with the rest of the world during a given period of time.
Definition of balance of Payment:
“The balance of payment of a country is a payment of a country is a systematic record of all economic transactions completed between its resident and the resident of the world during a given period of time, usually a year.”
Balance of Payment = Exported visible and invisible items - Imported visible and invisible items
Causes of Unfavourable Balance of Payment:
1. More demand of consumption goods:
When demand for consumption goods increases like when population increases or production decreases, the balance of payment becomes disequilibrium.
2. Price Disequilibrium:
Due to inflation and backward technology domestic prices have increased more than the increase in prices of foreign goods. This has led to an increase in import and decrease in exports. So, this causes price disequilibrium.
3. Foreign Competition:
When countries shift from the goods imported from one country to different countries due different reasons like price, quality etc. Then also exports of one country decrease due to foreign competition.
4. Less growth in exports:
Despite various export promotion schemes, our exports are still less than our imports. Moreover, the growth rate of exports is less than the growth rate of imports.
5. Population explosion:
Rapid growth of population in countries like India increases imports and decreases the capacity for exports. Moreover, whatever is produced extra for export purposes, the same is consumed within the country. This leads to an adverse BOP position.
Measures to correct disequilibrium in the Balance of Payments:
1. Promotion of Exports:
Promotion of export is the best measure to correct an adverse balance of payments. For this all taxes on export goods be withdrawn, export industries should be provided new materials and transport facilities at reduced prices, so that prices of these goods remain low.
2. Increase in Production:
Increase in production will lead to excess of final goods so a country can export the excess of final goods to different countries.
3. Trade Agreement:
More trade agreements should be done with foreign countries to promote our foreign trade and exports.
4. Encouragement of foreign investment:
Foreign industries and MNCs are encouraged to invest their capital in India. Special facilities are provided to attract foreign capital. It leads to an inflow of foreign capital.
5. Attraction to foreign tourists:
The government should spend a lot of money to develop picnic spots and resorts in different parts of the country. A large amount of foreign exchange can be earned from foreign tourists.
6. Devaluation of Indian Currency:
Lowering the value of the domestic currency in terms of foreign currency in terms of foreign currency in terms of foreign currencies is called devolution. The exchange rate of the currency may be reduced by the government. Foreign goods will become costly and local goods will become cheap. Imports will be cut down and exports will be pushed up.
FAQs
Causes of BoP Deficit
High outflow of foreign exchange to meet import demands like technology, machines, and equipment can lead to BoP deficit. Sustained rise in a country's prices can often make foreign products cheaper, leading to a high volume of imports. Unstable tax structures, change in government, etc.
What are the causes of balance of payments? ›
Causes of BoP Deficit
High outflow of foreign exchange to meet import demands like technology, machines, and equipment can lead to BoP deficit. Sustained rise in a country's prices can often make foreign products cheaper, leading to a high volume of imports. Unstable tax structures, change in government, etc.
What are the measures of balance of payments? ›
The balance of payments (BOP) is the method by which countries measure all of the international monetary transactions within a certain period. The BOP consists of three main accounts: the current account, the capital account, and the financial account.
What are the measures to adjust balance of payments? ›
The measures are:
- Adjustment through Exchange Depreciation.
- Devaluation or Expenditure-Switching Policy.
- Direct Controls of government.
- Adjustment through Capital Movements.
- Adjustment through Income Changes.
- Stimulation of Exports and Import Substitutes.
- Expenditure-Reducing Policies.
Measures To Correct Disequilibrium in the BOP
Quotas – Under the quota system, the government may fix and permit the maximum quantity or value of a commodity to be imported during a given period. By restricting imports through the quota system, the deficit is reduced and the balance of payments position is improved.
How can we solve the balance of payments problem? ›
To correct a balance of payments deficit , a country can devalue its currency, increase exports, reduce imports, or implement fiscal austerity. Devaluing the currency can make a country's exports cheaper and imports more expensive, thereby improving the balance of payments.
What is the main cause of adverse balance of payment? ›
Inflation i.e. continuous rise in prices in a country makes foreign goods relatively cheaper. It increases imports which cause a deficit in the Balance of Payment.
What are the determinants of balance of payment? ›
It has been based on the monetary approach for balance of payments. It has concerned the money supply, openness of the economy, real interest rate, real exchange rate, gross capital formation, politi- cal stability as the determinants of the balance of payments (Gureech, 2014).
What is an example of a balance of payments? ›
When funds go into a country, a credit is added to the balance of payments (“BOP”). When funds leave a country, a deduction is made. For example, when a country exports 20 shiny red convertibles to another country, a credit is made in the balance of payments.
What are the characteristics of balance of payments? ›
Main characteristics of ' Balance of Payments ' are :1 Systematic Record - It is a record of payments and receipts of a country related to its import and export with other country. 2 Fixed Period of Time – It is an account of a fixed period of time generally a year.
An increase in imports above the value of exports (imports > exports) affects the balance of payments. This should consequently, all other things being equal, depreciate the domestic country's currency. Consumer spending is instrumental in keeping the economy afloat even in the course of deflation.
What is the basic rule of balance of payments? ›
In international economics, the balance of payments (also known as balance of international payments and abbreviated BOP or BoP) of a country is the difference between all money flowing into the country in a particular period of time (e.g., a quarter or a year) and the outflow of money to the rest of the world.
What improves balance of payments? ›
Exchange Rate Adjustments: A depreciating currency can make exports cheaper and imports more expensive, improving the trade balance. Fiscal Policy: Governments can reduce budget deficits to increase national savings and reduce reliance on foreign borrowing.
What are the causes of balance of payment deficits? ›
3 Important Causes of Deficit in Balance of Payments
- These factors can be divided into three groups:
- (i) Developmental activities:
- (ii) High rate of inflation:
- (iii) Cyclical fluctuations:
- (iv) Change in Demand:
- (v) Import of Services:
- (i) Political Instability:
- (ii) Political disturbances:
Its imports and exports of goods are recorded under the Current Account section of the BOP. A significant deficit on the current account where imports are greater than exports would result in disequilibrium.
What causes equilibrium in the balance of payment? ›
When the demand and supply of any foreign currency in a country in a given time period is equal, it is termed as 'Equilibrium position' in the balance of payment. While a disequilibrium means that the condition is either deficit or surplus.
What are 3 factors that affect the balance of payments? ›
The most important factors are:
- Inflation.
- National Income.
- Government Restrictions.
- Exchange Rate.
Types of Balance of Payments Problem
These causes are current inflation, manifested by excessive spending; price and cost disparity reflecting an inflated level of home prices and costs; and structural changes resulting in a deterioration in the real international economic position of a country.
