5 Main Types of Disequilibrium in Balance of Payments (BOP)

The balance of payments (BOP) includes a value of non-commodity items that give rise to the International Monetary receipt and payments. Also, the balance of payments or BOP is more useful in economic calculation.

Types of Disequilibrium in Balance of Payments (BOP)

Broadly speaking, there are five different types of disequilibrium in the BOP:

Cyclical Disequilibrium.
Secular Disequilibrium.
Structural Disequilibrium.
Temporary Disequilibrium.
Fundamental Disequilibrium.

1. Cyclical Disequilibrium

in the BOP arises due to the influences of cyclical fluctuations.

Cyclical Disequilibrium in the BOP in the occur, because:

The business cycle /Trade cycle follow different paths and patterns in different countries.
There are no identical timing and periodicity of occurrence of cycles in different nations.
No identical stabilization programs and measures are adopted by different states.
Income Elasticities of demand for imports in different nations are not identical.
Price Elasticities of demand for imports differ in different nations. Deficit and surplus alternatively take place during the depression and prosperity phase of a cycle. The balance of payments equilibrium is automatically set forth over the complete cycle.

2. Secular Disequilibrium

Secular disequilibrium in the balance of payments is a long-term, phenomenon, caused by persistent, deep-rooted dynamic changes that slowly take place in the economy over a long period of time.

It may be caused by changes in several dynamic forces or factors such as capital formation, population growth, technological changes, the growth of markets, changes in resources, etc a newly developing nation, For instance, needs huge Investments which far exceed exports. It’s domestic savings. Its imports also tend to exceed exports.

If sufficient foreign capital is not forthcoming it may suffer from a secular deficit in its Balance of payments. On the contrary, a mature economy may have surplus capital and a favorable balance of trade.

If the outflow of capital is sufficient or restricted, a secular surplus in the balance of payments may accrue to the country.

3. 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.

A change in foreign demand for exports can arise from a change in technology, the invention of the cheaper substitute.

Similarly, a change in supply can arise from the dislocation of production because of strikes or other political punches or natural calamities. Service income from abroad may also decline because of a change in the economic situation or the economic policy of other Nations.

Structural changes are also produced by variation in the rate of international capital movement.

Structural disequilibrium at the factor level takes place when a country’s factor prices deviate disproportionately the factor endowment.

4. Temporary Disequilibrium

A country’s Balance of payments is of a temporary nature lasting for a short period which may occur once in a while.

Any factor which temporarily causes one-sided movement in the items constituting the Balance of payments is sufficient to cause a disequilibrium. This is subject to reversal within a limited period.

5. 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.

It is a secular disequilibrium emerging on account of the chronologically accumulated short-term disequilibrium deficit or surpluses.

It endangers the exchange stability of the country concerned.

Especially, a long-Run deficit in the Balance of payments of a country tends to deplete its Foreign Exchange Reserves and the country may also be unable to raise any more loans from foreigners on account of such persistent deficits.

In the Articles of Agreement of the IMF

The term Fundamental Disequilibrium was used to indicate a chronic or a long-term disequilibrium in the Balance of payments.

The IMF did not precisely define the term. It was generally interrupted to mean the disequilibria of a serious and enduring nature in member Nations’ current International transactions.

The fund authority considered measures to mobilize is the persistent effect of a deficit in Balance of payments on domestic employment as measures- “To correct a fundamental disequilibrium”.

A Fundamental equilibrium is said to exist when autonomous income and expenditure accord with each other over a given period without either necessitating import restrictions or causing excessive unemployment.

In practice, it is difficult to determine whether these criteria are fulfilled.

The underdeveloped nations generally suffer from long-term disequilibrium in the Balance of payments owing to a large number of causes and many Complex factors interacting with one another.

The root cause of disequilibrium in the Balance of payments of this Economics is the huge development and investment programs in operation in this economics.

They require the Import of Huge quantities of capital goods, technical know-how an essential raw material to carry on the development programs.

Thus, Now You know all different types of Disequilibrium in Balance of Payments.