Meaning of Balance of Payments
Balance of payment is an account of all economic and financial transactions of a country with the rest of the world. It contains all international transactions of individuals, government and companies of a country made during a defined time period (i.e. quarterly or yearly). Balance of payments is also known as the balance of international payments and abbreviated as B.O.P. It monitors all fund inflows and outflows of the nation and helps countries in developing better policies for their economic development.
Balance of payments is a means through which countries controls all their international monetary transactions. It denotes the value of imports and exports of a country and tells whether it has surplus or deficit of funds. In a perfect scenario, balance of payment should be zero which simply means value of imports is equal to value of exports. Surplus or deficit of funds in country’s BOP indicates the imbalance or disequilibrium BOP. Disequilibrium BOP denotes that the value of autonomous receipts is not equal to autonomous payments.
Different Causes of Disequilibrium in Balance of Payment
Unfavorable Balance of Trade
Excess of imports over the exports causes disequilibrium in balance of payments. When a country imports more goods than what it is exporting, it would lead to more outflow of funds thereby leading to disequilibrium in BOP.
Developing countries undertaking large development and investment projects need to import funds, capital, skilled manpower, and technology from developed countries. These development programs are time taking process and therefore requires continuous import for a long time which causes disequilibrium.
High Population Growth
Rapidly increasing population in countries is another important reason which leads to disequilibrium in BOP. With the growing population, it becomes essential for countries to imports goods for meeting the needs of their people.
The demonstration effect refers to the consumption pattern of developed countries being imitated by developing or under-developed countries. When peoples want to raise the level of a pattern of their consumption, the need for importing more goods arises.
Natural calamities like floods, drought, and earthquakes also cause disequilibrium in the country’s BOP. It destroys the agricultural and industrial production of the nation thereby adversely affecting its exports and creating the need for imports.
An increase in price level and income will bring an increase in the value of the country’s exports due to which it will decline. Whereas due to inflation country demand for imports will increase which will create more outflow of funds.
Huge External Borrowing
Excessive external borrowing is another main factor responsible for causing a surplus or deficit in country’s balance of payments. When a country heavily borrows funds from other countries it reflects more debt in its BOP.
Countries may lose their foreign exchange and gold reserves due to political uncertainties. Foreign investors in order to safeguard them against political instability may shift their capital leading to an outflow of funds thereby causing disequilibrium.