Question

Reasons of disequilibrium in balance of payment of developing nation

Answer 1

Explanation:

There are several variables which join together to constitute equilibrium in the balance of payments position of a country, viz., national income at home and abroad, the prices of goods and factors, the supply of money, the rate of interest, etc., all of which determine the exports, imports and demand and supply of foreign currency.

At the back of these variables lie the supply factors, produc­tion functions, the state of technology, tastes, the distribution of income, the state of anticipations, etc. If there is a change in any of these variables and there are no appropriate changes in other variables, disequilibrium will be the result

The main cause of the disequilibrium in the balance of payments arises from imbalance between exports and imports of goods and services. When for one reason or another exports of goods and services of a country are smaller than their imports, disequilibrium in the balance of payments is the likely result.

Exports may be small due to the lack of exportable surplus which in turn result from low production or the exports may be small because of the high costs and prices of exportable goods and severe competition in the world markets.

An important cause of small exports is the inflation or rising prices in the country. When the prices of goods are high in the country, its exports are discouraged and imports encouraged. If it is not matched by other items in the balance of payments, disequilib­rium emerges.