Question

Explain disequilibrium in the balance of payments. 

Answer 1

Disequilibrium in the Balance of Payments (BOP) occurs when a country’s total payments to other countries (imports, investments, etc.) are not equal to its total receipts from other countries (exports, income, etc.).

It usually means a deficit, where a country spends more foreign exchange than it earns, or a surplus, where it earns more than it spends.

Causes of Disequilibrium

1. Trade Deficit: When imports exceed exports.
2. High Inflation: Makes exports costly and imports cheaper.
3. Overvalued Currency: Reduces exports and increases imports.
4. Large Foreign Debt: Heavy loan repayments increase outflows.
5. Political or Economic Instability: Leads to capital flight.
6. Excessive Development Spending: Increases imports for machinery, oil, etc.