Price changes may be inflationary or deflationary. The changes differ in their duration and intensity from country to country and from time to time. If the current consumption is being financed by foreign borrowings, the wealth of the economy will decline. On the other hand, when there is boom in a country in relation to other countries, both exports and imports may increase. Autonomous transactions take place on their own all account of peoples desire to consume more or to make a larger profit. These will increase the money burden of the debt. As every country strives to a have a favorable balance of payments, the trends in, and the position of, the balance of payments will significantly influence the nature and types of regulation of export and import business in particular.
While depreciation is a spontaneous fall due to interactions of market forces, devaluation is official act enforced by the monetary authority. All the transactions are regrouped into autonomous and induced transactions. Otherwise if the situation continues for a long, the country will exhaust its foreign exchange reserves. If the balance of payments moves against a country, adjustments must be made by encouraging exports of goods, services or other forms of exports, or by discouraging imports of all kinds. In other words, when a currency is devalued its values are decreased in terms of foreign currency.
Price Changes and Disequilibrium The first and the major cause of disequilibrium in the balance of payment is the change in the price level. Cyclical Disequilibrium : It occurs on account of trade cycles. Linkage disequilibrium is the non-random association of alleles at two or more loci. But the excess of imports over exports may be financed by foreign investments in the country. Under such a measure, the central bank directs all exporters to surrender their foreign exchange to the central authority.
Dysequilibrium can be due to many different medical conditions. The changes, which occur as a result of disturbances ,in the domestic economy and abroad, create conditions for dis-equilibrium in the balance of payment. Devaluation refers to deliberate attempt made by monetary authorities to bring down the value of home currency against foreign currency. The reason being that a current account deficit is the same thing as a capital account surplus. Keynes noted that markets will most often be in some form of disequilibrium --- there are so many variable factors that affect financial markets today that true equilibrium is more of an idea.
At the same time, the demand for imports increase. The balancing item, which may be positive or negative, is simply an amount. Since development is a continuous process, imports of these items continue for the long time landing these countries in a balance of payment deficit. Thus, the innovation, whatever form it is, invites disequilibrium. Then it is rationed out among the licensed importers i. An actual balance sheet will typically have numerous sub headings under the principal divisions.
If a country is developing, it will have a deficit in its balance of payments because it imports raw materials, machinery, capital equipment, and services associated with the development process and exports primary products. Exports can be encouraged by producing quality products, by increasing exports through increased production and productivity, and by better marketing. No doubt, the external debt of the country increases, but this debt is being utilised to finance the rapid growth of the economy. It is quite known that every change in technology brings some comparative advantages which the other country tries to adjust, but the adjustment process itself brings a deficit in balance of payments. This would result in higher prices, which may result in the imports being much higher than exports.
There are a number of adjustments, which are done to correct the balance of payments disequilibrium. On the other hand, since the price is below the equilibrium price, suppliers will provide a smaller amount of wheat Q1 to sell as the price may be too low to cover their. The importers in the country, on the other hand, have now to pay more in terms of the devalued currency for foreign goods. A continued disequilibrium indicates that the country is heading towards economic and financial bankruptcy. Structural Disequilibrium Structural disequilibrium arises from structural changes occurring in few sectors of the economy at home or abroad which may alter the demand for supply conditions for exports or imports or both.
But while inviting the foreign capitalist to invest their capital within the country, the government sees to it that this does not produce any adverse repercussions on the economy. The real burden of this debt will be very low because it can be repaid out of higher income in the future. Encouragement to Foreign Investment The government induces the foreigners to make an investment in the country offering them all sorts of investors incentives and concessions. However, imports and exports do not determine themselves. It means, that the price of dollar falls in relation to the pound in the foreign exchange market. The result is the import becomes dearer. Since balance of payments becomes adverse chiefly on account of excess of imports over exports, the most urgent steps are to be taken in this direction.
Miscellaneous Measures These include- developing import substituting Industries, postponing debt payments, check on inflation, check on smuggling etc. It is a secular disequilibrium emerging on account of the chronologically accumulated short-term. Fundamental or Long Run Disequilibrium The long-term disequilibrium thus refers to a deep-rooted, persistent deficit or surplus in the Balance of payments of a country. Stimulation of Exports and Import Substitutes 7. Or it may tighten credit and money supply to make it difficult for domestic banks and firms to borrow the home currency to make investments abroad.
The following table will make the principle clear: 3. The exports, on the other hand, may not increase because these countries are traditionally primary producing countries. Equilibrium of Balance of Payments: Equilibrium is that state of the balance of payment over the relevant time period which makes it possible to sustain an open economy without severe unemployment on a continuing basis. A higher rate of return on real investment than the interest on foreign borrowings would increase the country's wealth over time through rise in its national income. The government also imposes exchange controls. The current account shows the net amount a country is earning if it is in surplus, or spending if it is in deficit.