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MEASURES TO CORRECT DISEQUILIBRIUM IN THE BALANCE OF PAYMENTS

What is balance of payment?

BALANCE OF PAYMENTS

The balance of payment is an n important index, which reflects the true economic position of country. It is, in fact, an annual record of its monetary transactions with other countries of the world. It indicates whether the country is a creditor country or a debtor country, and whether the external value of its currency is rising or falling. Thus, it is an annual record of the international receipts and payments of a country during a year.

what is the difference between balance of trade and balance of payment?
XI Economics What is balance of payment what is the difference between balance of trade and balance of payment What is the main cause of disequilibrium in the balance of payments How can balance of payments be improved


BALANCE OF TRADE vs. BALANCE OF PAYMENT
The balance of trade of a country indicates its trade transaction with the rest of world during a certain year. It takes into account only the aggregate value of visible exports and import. The visible exports and imports are those which are actually recorded at the ports. They are in form of goods only. If the money value of exports is greater than the money value of imports, then the balance of trade is said to be favorable to the country. Contrarily, if the money value of imports is greater than the money value of exports, the balance of trade is said to be unfavorable for the country.

The balance of payments gives a comprehensive picture of a country. It, besides the total value of visible exports and imports, also includes various types of invisible exports and imports, or non-commodity items. The invisible items are hose which are not recorded at the ports. These items are the services rendered by shipping, insurance and banking.

DISEQUILIBRIUM IN BALANCE OF PAYMENTS

A position of disequilibrium in the balance of payments is said to be existed when the payments, exceed its receipts. In the other words, when the demand for foreign exchange exceeds its payments, there is said to be a surplus in the balance of payments.


CAUSES OF DISEQUILIBRIUM IN THE BALANCE OF PAYMENTS
Natural Factor: National calamities, such as accordance of drought or floods may easily cause disequilibrium in the balance of payments. These natural calamities can adversely affect agricultural and industrial production.

Trade cycles: Business fluctuations caused by the operation of trace cycles may also result in equilibrium in a country’s balance of payments. For instance, if there occurs a business recession in foreign countries, it may induce a fall in the exports and exchange earning of the country concerned.

Inflationary pressure within the country: An inflationary rise in prices within the country may also lead to disequilibrium in its balance of payments, the prices of export items may go up thereby causing a decline in the volume of exports from the country concerned.

Large scale capital movements: The large scale capital movement can also induce disequilibrium in the balance of payments of the concerned country. A large inflow of foreign capital into the country is said to follow a favorable balance of payments.

Political instability: The political instability may also cause a serious disequilibrium in the concerned country’s balance of payments. For the existence of political instability may result in disrupting the productive potential within the country, thereby causing a decline in exports and an increase in imports.
How can balance of payments be improved?

MEASURES TO CORRECT DISEQUILIBRIUM IN THE BALANCE OF PAYMENTS

In order to eliminate the disequilibrium in the balance of payments a number of measures are needed to be adopted. Some of them may be of the following nature.

Exports must be promoted and Imports restricted.
If the exports have declined, appropriate steps should be taken to encourage them, for this purpose, the level of costs in the country should be brought down. This measure will help in cutting down of wages and interest rate and other incomes. This step will also help in contraction of currency to bring the prices down.

Devaluation of the home currency.
Another effective measure is to devalue the external value of the home currency. This step will help in cheapening domestic goods for the foreign markets. As a result of the fall in the external value of the currency with respect to the foreign currencies, the prices of goods to be exported fall and the prices of imports go up. This act encourages exports and discourages imports thereby the deficit in the balance of payments tends to be reduced.


Policy of deflation or reducing prices.
Since inflation or high prices in the country discourages exports and encourages imports, therefore, if steps are taken to check inflation and lower the prices in the country,


Exchange control.

According to exchange control policy, all exporters are direct to surrender their foreign exchange to the central bank. Central bank provides license to the importers for their importing needs. None else is allowed to import goods without a license holder. Thus, the balance of payments is rectified by keeping the imports within desired limits.

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