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Thursday, 4 April 2013



This issue is one of the three major macroeconomic problem,besides the case of inflation and exchange rate.In principle,balance of payment should be equilibrium when the account which is deficit is offset by account that is surplus.Equilibrium here refers to the manageable deficit are cancelled of by modest surpluses.
Balance Of Payment EQUILIBRIUM happens when:

(a).when the export of goods and services exceed import but there is substantial investment abroad by companies and residents.
Obviously,here we can see that,there is surpluses recorded in the current account and it is counterbalanced by the deficit of financial account.

(b).when the import of goods and services exceed export but where there is an inflow foreign direct investment.

---->Here,the current account becomes deficit and is offset by the surpluses of financial account.
Balance Of Payment DISEQUILIBRIUM happens when:

(a).when import of goods and services exceed export and the financial account is deficit.
The trading account(current) is deficit followed by financial account.Hence,there is lack of capital in the economy and might probably devalued the country's currency.

(b).when export of goods and services exceed import and there is persistent deficit in the financial account.
Here,the current account surpluses and is not offset due to persistent deficit in the financial account.


1.Developed economies has a high propensity of import.This lead to substantial deficit in the trading account.There is increasing demand of imported goods by consumer thus the domestic product become abundant and that is why trading account deficit because import of goods exceed export.As we can see,as import exceed export,country have to cover all of the imported and hence deficit in the financial account.The same happens to the developing economies.Generally developing economies have a limited domestic production and they often rely on imported goods to satisfy their consumer demand.Developing economies rely mostly on export revenue so as the term of trade are unfavourable,they need to export a greater volume of goods for the same export revenue.Thus Disequilibrium occur.

2.There may be lack of confidence in particular economy,resulting in fewer capital inflow.In some cases,exodus capital inflow also can lead to disequilibrium.Investor do not want to take risk by investing in our country.This normally will occur when it is related to particular event like politics rather than economics origin.

3.When there is increase in consumer spending power,thus most of them would be likely to look for imported goods rather than domestic.Thus as discussed above (1),there is likely for disequilibrium to happen.