Balance of payment disequilibrium

Business studies study module

This occurs when there is either deficit or surplus in the balance of payments accounts. If there is surplus, then the country would like to maintain it because it is favourable, while if deficit, the country would like to correct it.

Causes of balance of payment disequilibrium

It may be caused by the following;

  • Fall in volume of exports, as this will reduce the earnings from exports leading to a deficit.
  • Deteriorating in the countries terms of trade. That is when the country’s exports decreases in relation to the volume of imports, then her payments will higher than what it receives.
  • Increasing in the volume of import, especially if the export is not increasing at the same rate, then it will import more than it exports, leading to a disequilibrium
  • Restriction by trading partners. That is if the trading partners decides to restrict what they can import from the country to a volume lower than what the country import from them, it will lead to disequilibrium
  • Less capital inflow as compared to the out flow, as this may lead to a deficit in the capital account, which may in turn leads to disequilibrium.
  • Over valuation of the domestic currency. This will make the country’s export to very expensive as compared to their import, making it to lose market at the world market
  • Devaluation of the currency by the trading partner. This makes the value of their imports to be lower, enticing the country to import more from them than they can export to them.

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