Readers Question: Explain what is meant by a balance of payments disequilibrium?
The Balance of Payment is comprised of two main components
- The Current Account (trade in goods, services + investment incomes
- The Financial Accout (used to be called capital account)
The balance of payments measures the value of imports and exports. If the UK import more goods and services than we export then we have a deficit on the Current Account. A deficit on the current account is generally referred to as disequilibrium.
The UK currently has a deficit on the current account. Last year in 2007, the trade deficit widened to £4.4bn in the month of December See ONS - balance of payments
Note a large surplus on the current account would also be seen as a disequilibrium.
Overall Equilibrium in Balance of Payment.
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)
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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
if balance of payment must always be balanced .why then do we still have balance of payment diseqilibrium. support answe with illustrations and diagrams.
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.
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