Disequilibrium in Balance of Payments
Several reasons such as differences in the value of exports and imports cause disequilibrium in the balance of payments. The disequilibrium may be either in minus, deficit, unfavorable side or plus, surplus, favorable side. Let us see the favorrable and unfavourable balance of Payments concepts below:
Unfavourable/ Favourable BoP
Balance of Payments is unfavorable when the Payments (debit) of the country is more than its receipts (credit). Meanwhile, when the receipts (credit) are more than the Payments (debit), the BoP is said to be favorable. Disequilibrium in Balance of Payments can be understood as:
- Favourable BoP
- Unfavourable BoP
Favourable BoP
When the receipts are more than the Payments, then there is a favourable balance of Payments. Such a situation increases foreign exchange reserves. The export of goods, services, and capital receipts is more than that of the imports. It is also known as surplus BoP
Bf = R – P > 0
Bf = Balance of Payments
R – P > 0 = Receipts are greater than Payments or their difference is positive
Unfavourable BoP
There is an unfavourable BoP when the Payments are more than the receipts. Such a situation reduces foreign exchange reserves. As well, the exports of goods, capital receipts, and services are less than that of the imports. It is also termed as a deficient balance of Payments.
Bu = R – P < 0
Bu = Unfavourable BoP
R – P < 0 = Receipts are less than the Payments or their difference is negative
Equilibrium in BoP
When the capital receipts and exports (both visible and invisible) of a country are equal to its capital imports and Payments (visible and invisible), then it is called equilibrium in the Balance of Payments.
B = R – P = 0
B = Balanced BoP
R = Receipts
P = Payments
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