Disequilibrium in the balance of payment is caused by which economic factor?

The correct answer is - Secular disequilibrium

Key Points

• Secular disequilibrium
  • Occurs when long-term structural issues cause imbalances in the balance of payments.
  • It is often linked to factors such as differences in economic growth rates, inflation, and productivity between countries.
  • Persistent trade deficits or surpluses, driven by structural factors, contribute to this form of disequilibrium.
  • Common causes include:
    • Insufficient domestic production leading to reliance on imports.
    • Export sectors that fail to compete in international markets.
    • Global economic shifts such as changes in commodity prices.

Additional Information

• Balance of Payments (BoP)
  • Refers to the systematic record of all economic transactions between a country and the rest of the world over a specific period.
  • It consists of two main components:
    • Current Account: Includes trade in goods and services, income from abroad, and current transfers.
    • Capital Account: Covers capital transfers and acquisition/disposal of non-produced, non-financial assets.
• Other Types of Disequilibrium in BoP
  • Monetary Disequilibrium: Caused by inflation, exchange rate fluctuations, or changes in monetary policy.
  • Trade Disequilibrium: Arises from imbalances in exports and imports.
  • Balance of Payment Deficit: Occurs when outflows exceed inflows, requiring external borrowing or reserve depletion.
• Solutions to Secular Disequilibrium
  • Promoting export-oriented industries to enhance trade balance.
  • Improving competitiveness through technological and productivity enhancements.
  • Implementing structural reforms to reduce reliance on imports.