How can Disequilibrium in Balance of Payments be Corrected?
- 1. Decrease in Foreign Exchange: If gold regularly flows out of the country, its balance of payments is supposed to be in disequilibrium. Now a days decrease in foreign exchange reserves indicates the same thing. ...
- 2. Increase in Foreign Loans: Secondly, if the volume of foreign loans increases, it only means that the country’s balance of payments is in disequilibrium. ...
- 3. Exchange Depreciation:
What are the causes of disequilibrium in balance of payments?
If the country is already at full employment level, an increase in income will lead to inflationary rise in prices which may increase its imports and thus bring disequilibrium in the balance of payments. 7. Price Changes: Inflation or deflation is another cause of disequilibrium in the balance of payments.
How do expenditure-switching policies help in correcting disequilibrium in balance of payments?
Expenditure switching policies may lower the prices of exports which will encourage exports of a country. In this way by changing relative prices, expenditure-switching policies help in correcting disequilibrium in balance of payments.
How to correct a continuous deficit in balance of payments?
A continuous deficit in balance of payments will have to be corrected eventually. There are many methods for correcting the disequilibrium. Some important methods are discussed below. Imports can be restricted. This may be done by fixing import quotas and in some cases by prohibiting the import of some non-essential commodities.
Does devaluation or depreciation correct disequilibrium in balance of payments?
To sum up, it follows from above that for devaluation or depreciation to be successful in correcting disequilibrium in the balance of payments, the sum of price elasticities of demand for a country s exports and imports should be high (that is, greater than one) and secondly it should have sufficient exportable surplus.
How can we correct the disequilibrium in balance of payment?
Following are the main methods of Correct Disequilibrium in Balance of Payments:Monetary Policy (Deflection) ... Exchange Depreciation. ... Devaluation. ... Exchange Control. ... Fiscal Policy- Import Duties. ... Import Policy (Import Quotes) ... Stimulating/Improving Export. ... Foreign Loans.More items...
What are the reasons for disequilibrium in balance of payments How can it be improved?
Causes of Disequilibrium in Balance of PaymentsUnfavorable Balance of Trade. ... Cyclical Fluctuations, their Phases, and Amplitudes. ... Burden of Payment of Foreign Debt. ... Speedy Economic Development. ... Inadequate Promotion of Exports. ... Inflationary Spiral at Home. ... Capital Movements. ... Natural Factor.More items...
What is disequilibrium in balance of payments?
A disequilibrium in the balance of payment means its condition of Surplus Or deficit. • A Surplus in the BOP occurs when Total Receipts exceeds Total Payments.
What are the methods available to restore equilibrium?
Fall in prices will stimulate exports and reduction in income checks imports. Thus, deflationary policy restores equilibrium to the balance (a) by encouraging exports through reduction in their prices and (b) by discouraging imports through the reduction in incomes at home.
What are the main causes of disequilibrium of balance of payment?
However, following are the important causes producing disequilibrium in the balance of payments of a country:Trade Cycles: ... Huge Developmental and Investment Programmes: ... Changing Export Demand: ... Population Growth: ... Huge External Borrowings: ... Inflation: ... Demonstration Effect: ... Reciprocal Demands:
How can balance of payment be improved?
First, fall in domestic prices or lower rate of inflation will induce people to buy domestic products rather than imported goods. Second, lower domestic prices or lower rate of inflation will stimulate exports. Fall in imports and rise in exports will help in reducing deficit in balance of payments.
What are the two types of balance of payment disequilibrium?
ADVERTISEMENTS: Main types of disequilibrium in the balance of payments are: i. Cyclical Disequilibrium ii. Structural Disequilibrium iii.
How can balance of payment deficit be reduced?
A deficit in the balance of payments can also be corrected by encouraging exports. Exports can be encouraged by producing quality products, by increasing exports through increased production and productivity, and by better marketing. They can also be increased by a policy of import substitution.
How can balance of payment be improved?
First, fall in domestic prices or lower rate of inflation will induce people to buy domestic products rather than imported goods. Second, lower domestic prices or lower rate of inflation will stimulate exports. Fall in imports and rise in exports will help in reducing deficit in balance of payments.
How can India improve balance of payment?
Important methods of correcting Balance of payment are as follows:Deflation: It is the classical medicine for correcting deficit in Balance of payment. ... Depreciation: ... Devaluation: ... Exchange Control: ... Capital Movement: ... Encouraging Exports: ... Discouraging Imports:
What induces disequilibrium in BOP in developing countries?
Such disequilibrium is caused due to changes in the international demand or supply of a product or changes in the institutions of the economy. If the demand for imports is inelastic,there may arise trade deficit which may give rise to balance of payments deficit.