Factors that cause disequilibrium in Balance of Payment (BOP).

  

Date Posted: 8/31/2012 3:43:46 AM

Posted By: SimonMburu  Membership Level: Silver  Total Points: 838

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Balance of Payment (BOP) is the accounting record of all monetary transactions between a given country and the rest of the world. The transactions comprises of payments for country's export and imports of goods and services.
Disequilibrium in the Balance of Payment may take place either in the form of deficit, that is, when the receipts from the foreigners fall below a country's payment and surplus disequilibrium which arises when the receipts of the country exceeds its payments, which is favorable.
These forms of disequilibrium may be caused by the following factors;

1. Population growth: Most countries experience rapid population growth which lead to a high quantity of import that exceeds the quantity of export. This leads to a disequilibrium of deficit.

2. Development programmes: Third world countries always have so many development programmes that require raw materials and highly skilled labor. Due to lack of these resources, imports have to be made and this continues for a long time leading a country to disequilibrium in balance of payment.

3. Inflation: An increase in price levels and income leads to rapid economic development in developing countries. This increases imports and reduces exports leading to a deficit in balance of payment.

4. Natural calamities:Natural calamities such as floods, earthquakes and diseases cause disequilibrium in balance of payment as they adversely affect agriculture and industrial production in the country.

5. Demonstration effect: When people in less developed countries imitate the consumption pattern of developed countries they end up increasing imports as export remains constant or decline. This causes a disequilibrium on balance of payment.

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