Readers Question: Explain what is meant by a balance of payments disequilibrium?
The Balance of Payments is comprised of two main components:
- The Current Account (trade in goods, services + investment incomes)
- The Financial Account (used to be called capital account; this is capital flows such as foreign direct investment)
If the UK imports more goods and services than we export – then we have a deficit on the current account. A significant deficit on the current account is generally referred to as disequilibrium. It will be matched by a surplus on the financial account.
In the post war period, the UK has usually had a current account deficit, apart from a brief surplus in the early 1980s and 2000s. The UK currently has a deficit on the current account.
See ONS – balance of payments
Note a large surplus on the current account would also be seen as a disequilibrium. – e.g. Japan or China have large current account surplus – current account surplus
Germany’s large current account surplus was seen as an imbalance within the Eurozone – see: German current account surplus
Current account suggests wider disequilibrium in the Economy
- A large current account deficit may be an indication that the economy is too much geared towards spending (e.g. spending on imports) and too little on exports.
- A current account deficit may also be a sign of underlying inflationary pressures. As domestic goods increase in price, people buy imports instead.
- It may also be an indication the country is losing competitiveness. This is especially important in a fixed exchange rate.
- It is also a reflection, saving is less than investment and investment is being financed by capital inflows.
Overall Equilibrium in Balance of Payments
In a floating exchange rate, the two components of the Balance of Payments should balance each other out. If the UK has a deficit on the current account of £38bn. Then in a floating exchange rate, the financial account should have a surplus of £38bn. This is because financial outflows must be matched by financial inflows.
Example, if we buy more imported goods than exported goods then we need financial flows (e.g. hot money, long term capital investment to finance the purchase of imports)
Balance of Payments Disequilibrium and Fixed Exchange Rates
When a country has a fixed exchange rate, there is more likely to be a balance of payments problem. For example, in 2011, several Euro countries were relatively uncompetitive. However, because they are in the Euro, it is not possible to devalue against other European countries. Therefore, they are stuck with exports which are too expensive. Therefore, we tend to see a large current current account deficit.
Portugal and Greece both have a serious balance of payments disequilibrium caused by a decline in competitiveness.
Global Imbalances
Balance of payments disequilibrium can be causes of global imbalances e.g. Large flow of capital from China to US.
Some argue this was a factor in credit crunch of 2008. Large flows of capital from China to US kept yields on securities and bonds artificially low, creating a bubble in certain risky assets. See: Global imbalances
The current account can also be seen as an imbalance between domestic savings and domestic investment. If domestic saving is lower than domestic investment, then we will see a current account deficit. The excess domestic investment will be financed by capital inflows from abroad. See: Current account = Saving – investment
Related
Though the credit and debit are written balanced in the balance of payment account, it may not remain balanced always. Very often, debit exceeds credit or the credit exceeds debit causing an imbalance in the balance of payment account. Such an imbalance is called the disequilibrium. Disequilibrium may take place either in the form of deficit or in the form of surplus.
Disequilibrium in Balance of Payment
Image Credits © Anita Anand.
Disequilibrium of Deficit arises when our receipts from the foreigners fall below our payment to foreigners. It arises when the effective demand for foreign exchange of the country exceeds its supply at a given rate of exchange. This is called an ‘unfavourable balance’.
Disequilibrium of Surplus arises when the receipts of the country exceed its payments. Such a situation arises when the effective demand for foreign exchange is less than its supply. Such a surplus disequilibrium is termed as ‘favourable balance’.
What is disequilibrium in balance of payments? Also explain the correcting mechanism to solve
this problem.
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Very well written as compared to others but very brief. I’d really like some more information.
plsease i need material on the balance of payment disequilibrium and the performance of nigerian economy.project work
actully why the disequilibrium requires in balance of payment required without it it cannot manage y
whoud or shoud be asked on balance of payment withans
please give me details of how price adjustment machanism will remove the balance of payment disequilibruim with the help of diagram
more information please
since it is true that balance of trade must always balance,explain.
what causes capital accounts crisis within balance of payment especially in developing countries and the policies to prevent and cope with these crisis.
why should economics always be based on assumptions, why should we run from the true facts.
please answer question no: 1
what are the factors affecting balance of payment in Nigeria
it is to eazy to calculate gdp and understand economics
Who is maintaining this Balance Of Payment ? How do u come to know if u want to c the Deficit or Surplus in the Balance of Payment ?
In what sense can a balance of payment be in equilibrium and in what sense will it always balance
what are the different methods of calculating the balance of payment and the derivation of there formulars.
the trends in the indias balance of payment position .what are the reason for disequilibrium in the balance of payment
methods to overcome balance of payment disequilibrium in economics?
the trends in the indias balance of payment position .what are the reason for disequilibrium in the balance of payment
help me solve the question
if balance of payment must all be balance while then do will still have balance of payment disequilibrium? support your answer with diagram and graph
“Imbalance of payment must always balance” then why do we still have balance of payment disequilibrium. DISCUSS EXTENSIVELY
Why when the quantity supplied greater than the quantity demanded can’t be described as a surplus?
what exactly is BOP diequilibrium?
plz tell us about disequilibriumon bop
what wre the consequences of bop disequilibrium to domestic and international market?
what is equilibrium & equilibrium means deficit?
explanations are well but it is just based on uk. what about other countries. do the explanations remains same for all countries?
balnce of payment is always deficit in developing countries .Why?
measures to improve balance of payments include improving domestic industry.
mail me the measures to improve balance of payment.
will you mail me the balance of payment of india and pakistan
suggest measures for improving balance of payments in India.
on what factors does the balance of payments depend?
discuss how devolution helps in the correction of adverse BOP of a country. is this measure equally applicable to the developing countries exporting mainly primary goods?
discuss how devolution helps in the correction of adverse BOP of a country. is this measures equally applicable to the developing countries exporting mainly primary goods?
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plz help us
if balance of payment must all be balance while then do will still have balance of payment disequilibrium? support your answer with diagram and graph
How BOP disequilibrium can be restored?
Disequilibrium will exist even if the BOP is balanced because while a country’s imports (expenditure) may be than its exports (revenue), it could still be getting revenue by some mean other than exporting its goods. Read up on on the capital & current accounts and what makes up these accounts and you will get the full gist of what I mean.
if balance of payment must always be balanced .why then do we still have balance of payment diseqilibrium. support answe with illustrations and diagrams.
help me solve the question
if balance of payment must all be balance while then do will still have balance of payment disequilibrium? support your answer with diagram and graph