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Question
Briefly explain two reasons for the adverse Balance of Payments in any economy.
Solution
Two reasons for the adverse Balance of Payments in any economy are:
- Cyclic fluctuations: Cyclic fluctuation in business activity leads to BOP disequilibrium. When there is a depression in a country, volume of both export and imports falls. But the fall in exports may be greater than the fall in imports, due to the decline in domestic production. Therefore there is an adverse BOP situation or disequilibrium.
- Price changes: If there is inflation in the country, prices of the exports increase. As a result, the export falls. At the same time, the demand for imports increases. This results in an adverse balance of payment.
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