When does the problem of unfavourable balance of payment arise?

The correct answer is When imports are greater than exports

Key Points

• The problem of an unfavourable balance of payment arises when the value of imports exceeds the value of exports in a country.
• This means that the country is spending more money on buying goods and services from abroad than it is earning from selling goods and services to other countries.
• It is also known as the balance of payment deficit.
• Some possible causes of unfavourable balance of payments are high inflation, trade restrictions by other countries, and low competitiveness.

 Additional Information

Balance of payment deficit

• A balance of payment deficit is a situation in which the payments a country makes are more than the payments it receives.
• Essentially, more money leaves the country than is brought into it, and the country suffers a decrease in its supply of money.
• It is also known as a balance of payment gap.
• A balance of payment deficit can arise if a country imports more capital, goods, and services than it exports.
• This deficit can be balanced by utilizing the country’s foreign exchange reserves to meet the balance of payment shortfall.
• If the deficit continues for a long time, it can lead to inflation and a lower standard of living.