What value is affected if the economy is not in balance of payment eqilibrium? Class 12th economics
Answers
The country from which we were importing and marking payment in gold would face an increase in prices and cost. There would be dis equilibrium. Normally the BOPof the country losing gold, and worsen that of the country with the favourable trade balance, until equilibrium In international trade is re-established at relative prices that keep Import and export In balance with no further net gold flow. Thus, fixed exchange rates were maintained by an automatic equilibrating mechanism.
Definition and Explanation:
"The equilibrium of balance of international payment is a statement that takes into account the debits and credits of a country on international account during a calendar year".
When a country has unfavorable or adverse balance of payments, it is regarded as herald of disaster because the country by having deficit in her balance of payments either decreases her balances abroad or increases her foreign debits. When it has favorable credit balance, it is considered that the country is heading towards prosperity because by having surpluses, it either increases her foreign credits or reduces her foreign debits.
There is no doubt that a study of country's balance of payment reveals much information about its economic position and development of the country. But when we are to see that a country is heading towards financial bankruptcy or higher standard of living, we are to examine the balance of payments of many years of that country.
A persistent deficit in the balance of payments on current account certainly leads to economic and financial bankruptcy. A continued favorable balance on current account is also disadvantageous because it creates difficulties for other countries. The credit country may utilize her surplus in advancing short or long term loans to the debtor country. But if it gives no opportunity to the debtor country to repay the loan by exporting more, then how can the loans he realized?
The hard earned surplus of the credit country will then one day be turned into gifts and this may create political difficulties for the creditor country. We have seen, thus that a country should neither have unfavorable nor favorable balance of payment on current account in perpetuity. It must obtain equilibrium in her balance of payments over a reasonable period of time. From this it may not be concluded that a country should balance her account every year with every country with which it has trade relations.
A country may have favorable balance of payment with one country and unfavorable with another but in the long run it must balance her account. The total liabilities and total assets of all nations related to one currency block must balance over a reasonable period of time.