Question

Briefly explain two reasons for the adverse balance of payments in any economy.

Mention two causes of adverse balance of payments.

Answer 1

Two reasons for the adverse Balance of Payments in any economy are:

1. Cyclic fluctuations: Cyclic fluctuation in business activity leads to BOP disequilibrium. When there is a depression in a country, the volume of both exports 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.
2. 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.

Answer 2

Two reasons for a country’s adverse balance of payments are:

1. Decline in exports: A drop in a country’s exports can cause a balance of payments deficit, as it reduces the inflow of foreign exchange.
2. Inflationary pressure: Domestic inflation may lead to higher imports and lower exports, resulting in an unfavorable balance of payments.