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Home Balance of Payments Equilibrium of Balance of Payments

Equilibrium of Balance of Payments:

 

Definition and Explanation:

 

"The equilibrium of balance of international payment is a statement that takes into account the debits and credits of a country on international account during a calendar year".

 

When a country has unfavorable or adverse balance of payments, it is regarded as herald of disaster because the country by having deficit in her balance of payments either decreases her balances abroad or increases her foreign debits. When it has favorable credit balance, it is considered that the country is heading towards prosperity because by having surpluses, it either increases her foreign credits or reduces her foreign debits.

 

There is no doubt that a study of country's balance of payment reveals much information about its economic position and development of the country. But when we are to see that a country is heading towards financial bankruptcy or higher standard of living, we are to examine the balance of payments of many years of that country.

 

A persistent deficit in the balance of payments on current account certainly leads to economic and financial bankruptcy. A continued favorable balance on current account is also disadvantageous because it creates difficulties for other countries. The credit country may utilize her surplus in advancing short or long term loans to the debtor country. But if it gives no opportunity to the debtor country to repay the loan by exporting more, then how can the loans he realized?

 

The hard earned surplus of the credit country will then one day be turned into gifts and this may create political difficulties for the creditor country. We have seen, thus that a country should neither have unfavorable nor favorable balance of payment on current account in perpetuity. It must obtain equilibrium in her balance of payments over a reasonable period of time. From this it may not be concluded that a country should balance her account every year with every country with which it has trade relations.

 

A country may have favorable balance of payment with one country and unfavorable with another but in the long run it must balance her account. The total liabilities and total assets of all nations related to one currency block must balance over a reasonable period of time.

 

Causes of Disequilibrium in the Balance of Payment:

 

Balance of international payment is a summary account of total debits and credits of a country during a year. It includes both visible and invisible trading terms, i.e., merchandize imported and exported, interest on dividend received and paid, payments and receipts of transport services, commission, insurance, brokerage, etc., received and paid money lent abroad or borrowed, movement of gold, etc., etc.

 

Disequilibrium in the balance, of payments can arise due to persistently one sided movement of one or more than one trading terms. If, for instance, the total value of goods exported exceeds the total value of the goods imported over a given period and this surplus is not offset by the debit balance on invisible item, the country will have favorable balance of payments. Disequilibrium in the balance arises when exports of a country fall short of imports because of decrease in production at home, due to stiffer competition abroad or of an appreciation in the currency or fall of purchasing power of the buyers in the foreign market.

 

When the imports remain unaffected or increase, then the country will also face deficit in her balance on invisible items, the country will have disequilibrium in her balance of payments. Disequilibrium in her balance of payments can also arise over a given period due to excessive imports not equalized by exports of invisible items and if it is not offset by credit balance on visible items, the country will face disequilibrium in her balance of payments.

Relevant Articles:

Balance of Trade and Balance of Payments
Presentation of International Balance of Payments
Equilibrium of Balance of Payments
Methods of Correcting Disequilibrium in Balance of Payments
 

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