Question

Explain any two causes of deficits in the balance of payments.

Answer 1

1. Fall in Foreign Demand: Payments balance A change in foreign demand from the nation's goods to those of other nations may result in a deficit. This could be because foreign consumers' tastes and styles have changed or because products from other nations are now more affordable. Occasionally, a decline in foreign income brought on by a recession may result in a decline in the demand for the nation's commodities abroad. Therefore, factors outside of this nation's control may cause a decline in overseas demand. When exports decline due to a decline in international demand, the balance of payments becomes unfavourable.
2. Inflationary Pressures in the Economy: Domestic inflation can lead to an unfavourable balance of payments in a growing nation like India. Because imports are comparatively less expensive, a high domestic inflation rate promotes imports. Additionally, it makes the nation less competitive on international markets, which lowers exports. As a result, both an increase in imports and a decrease in exports as a result of rising domestic prices may make the balance of payments negative.