Question

Explain any three causes for disequilibrium in the balance of payments of a country.

Explain any four causes of disequilibrium in the balance of payments of a country.

Explain any two causes of disequilibrium in the balance of payment.

Answer 1

1. Natural Factors: Natural causes can sometimes lead to a decrease in agricultural and industrial output. Output is decreased by occurrences such as floods, droughts, shortages of seeds or fertiliser, labour strikes, or shortages of equipment and raw supplies. Exports consequently decline, creating a negative balance of payments.
2. Change in Price-Cost Structure of Export Industries: Both the volume of exports and the balance of payments may be impacted by changes in the price-cost structure of a nation’s export industries. Exports may decline as a result of rising raw material prices or costs, which would negatively impact the balance of payments.
3. Expenditure on Embassies: Large expenditures for ambassadors, diplomatic missions, and associated operations are frequently incurred by recently independent nations, which has a detrimental effect on their balance of payments.
4. Development Schemes: Developing nations depend on developed ones for technical know-how, raw materials, and machinery. Their imports therefore exceed their exports, resulting in a negative balance of payments.
5. Rate of Foreign Exchange: The balance of payments is impacted by changes in the foreign exchange rate. Imports become less expensive and exports become more costly for other nations as a nation’s currency appreciates in value. As a result, imports increase while exports decrease.
6. Fall in Demand: International markets can see a decline in the demand for a nation’s goods. Lower consumer income, increasing production costs, changing customer preferences, or heightened competition from overseas can all contribute to this. Exports fall when demand declines, creating a negative balance of payments.
7. Trade Cycles: Capitalist economies frequently experience trade cycles, which are characterised by periods of rising and declining prices. During a depression, other nations’ declining earnings lower their desire for imports, which in turn lowers exports. The balance of payments becomes unbalanced as a result.
8. Demonstration Effect: According to Nurkse, people in underdeveloped countries often attempt to copy the consumption habits of those in developed nations. This imitation, known as the demonstration effect, leads to a significant rise in imports, resulting in a balance of payments imbalance.