Bop disequilibrium causes

The balance of payments of a country is said to be in equilibrium when the demand for foreign exchange is exactly equivalent to the supply of it. The balance of payments is in disequilibrium when there is either a surplus or a deficit in the balance of payments. When there is a deficit in the balance of payments, the demand for foreign exchange exceeds the demand for it.

 A number of factors may cause disequilibrium in the balance of payments. These various causes may be broadly categorized into: (i) Economic factors ; (ii) Political factors; and (iii) Sociological factors. Economic Factors: A number of economic factors may cause disequilibrium in the balance of payments. These are:

Development Disequilibrium: Large-scale development expenditures usually increase the purchasing power, aggregate demand and prices, resulting in substantially large imports. The development disequilibrium is common in developing countries, because the above factors, and large-scale capital goods imports needed for carrying out the various development programmes, give rise to a deficit in the balance of payments. Capital Disequilibrium: Cyclical fluctuations in general business activity are one of the prominent reasons for the balance of payments disequilibrium. As Lawrance W. Towle points out, depression always brings about a drastic shrinkage in world trade, while prosperity stimulates it. A country enjoying a boom all by itselt ordinarily experiences more rapid growth in its imports than its exports, while the opposite is true of other countries. But production in the other countries will be activated as a result of the increased exports to the boom country.

 Secular Disequilibrium: Sometimes, the balance of payments diequilibrium persists for a long time because of certain secular trends in the economy. For instance, in a developed country, the disposable income is generally very high and, therefore, the aggregate demand, too, is very high. At the same time, production costs are very high because of the higher wages. This naturally results in higher prices. These two factors - high aggregate demand and higher domestic prices may result in the imports being much higher than the exports. This could be one of the reasons for the persistent balance of payments deficits of the USA.

 Structural Disequilibrium: Structual 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, the exhaustion of productive resources, the changes in transport routes and costs, etc.

 Political Factors: Certain political factors may also produce a balance of payments disequilibrium. For instance, a country plagued with political instability may experience large capital outflows, inadequacy of domestic investment and production, etc. These factors may, sometimes, cause disequilibrium in the balance of payments. Further, factors like war, changes in world trade routes, etc., may also produce balance of payments difficulties. Social Factors: Certain social factors influence the balance of payments. For instance, changes in tastes, preferences, fashions, etc. may affect imports and exports and thereby affect the balance of payments