Types of Disequilibrium and Causes of Disequilibrium

Types of Disequilibrium and Causes of Disequilibrium

INTRODUCTION

An equilibrium in the balance of payment is sign of the soundness of countries economy it means strong economy. A disequilibrium can be in the form of deficit and surplus. The surplus is the balance of payment is not considered as a serious problem. A continued deficit in the balance of payments indicates that the country is going towards economic and financial bankruptcy.  Therefore, every country tries to maintain Balance of Payment equilibrium. The current account deficit is the most serious problem in the balance of payment disequilibrium. 

TYPES OF DISEQUILIBRIUM

SHORT-RUN

LONG-RUN

CYCLICAL

STRUCTURAL

1. SHORT-RUN 

Short-Run is a disequilibrium that operate for one year. Such deficits occur due to sudden increase in demand for foreign goods and services. Domestic problem may arise due to the failure of monsoon, natural calamities or political disturbance etc. Which may result in an increase in imports or decline in export.

2. LONG- RUN

Disequilibrium that operates for continuously for a long period of time is called Long-Run disequilibrium. A long-run disequilibrium occurred due to continuous excess demand for foreign exchange rather than supply. The main fundamental causes for disequilibrium can be found in

#Excess imports for planned economic development

#Increase in the price of imports i.e increase in crude oil price.

#Continuous imports of essential goods in populated country.

#Change in habits, taste and income etc. 

3. CYCLICAL DISEQUILIBRIUM

Economic activities are subject to business cycles which have four phase

PROSPERITY OR BOOM

RECESSION

DEPRESSION

RECOVERY

During the PROSPERITY period, imports increase. Export may increase during recession or depression due to decline in price. Import usually decline during this period due to reduced income. Except , if economic strong countries undergo RECESSION or  DEPRESSION phase of business cycle , it would affect many other countries. Countries suffering depression will have more unemployment and less income thus discouraging imports from other countries.

4. STRUCTURAL DISEQUILIBRIUM

It arises due to structural changes in the economy affecting change in demand of people. Export of a country may decline if in the rest of world demand is diverted to other commodities due to change in Taste, fashion, Habits or Income. 

Causes of Disequilibrium 

Any disequilibrium in balance of payments is the result of imbalance between receipts and payments for exports and imports. A deficit in balance of payments of which we are more concerned is obviously import more than exports, it means payment side of balance of payments more than receipt side.