Question

Discuss the various types of disequilibrium in the balance of payments.

Answer 1

Types BOP Disequilibrium:
There are three main types of BOP Disequilibrium, which are discussed below.

1. Cyclical Disequilibrium,
2. Secular Disequilibrium,
3. Structural Disequilibrium.

1. Cyclical Disequilibrium:
Cyclical disequilibrium occurs because of two reasons. First, two countries may be passing through different phases of the business cycle. Secondly, the elasticities of demand may differ between countries.

2. Secular Disequilibrium:
The secular or long-run disequilibrium in BOP occurs because of long-run and deep-seated changes in an economy as it advances from one stage of growth to another. In the initial stages of development, domestic investment exceeds domestic savings, and imports exceed exports, as it happens in India since 1951.

3. Structural Disequilibrium:
Structural changes in the economy may also cause balance of payments disequilibrium. Such structural changes include the development of alternative sources of supply, the development of better substitutes, exhaustion of productive resources, or changes in transport routes and costs.