BALANCE OF BOP

Deficit in BOP

• The balance of payments of a country is a systematic record of all economic transactions between the residents of foreign countries during a given period of time.
• The transaction in the balance of payment account can be categorized as autonomous transactions and accommodating transactions.
• Autonomous transactions are transactions done for some economic consideration such as profit.
• When the total inflows on account of autonomous transactions are less than total outflows on account of such transactions, there is a deficit in the balance of payments account.
• Suppose, the autonomous inflow of foreign exchange during the year is $500, while the total outflow is $600. It means that there is a deficit of $100.

Disequilibrium in Balance of Payments: 

There are a number of factors that cause disequilibrium in the balance of payments, showing either a surplus or deficit. These causes are:

1. Economic Factors
   (i) Large scale development expenditure that may cause large imports.
   (ii) Cyclical fluctuations in general business activity such as recession or depression.
   (iii) High domestic prices may result in imports.
2. Political Factors: Political factors instability may cause large capital outflows and hamper the inflows of foreign capital.
3. Social Factors: Changes in tastes, preference and fashions of the people bring disequilibrium in BOP by inflowing imports and exports.

In economics sense, BOP need not be always equal. BOP can be:

• Balanced BOP: BOP is balances when receipts of foreign exchange are equal to payments of foreign exchange.
• Surplus BOP: BOP is in surplus when receipts of foreign exchange are more than payments of foreign exchange.
• Deficit BOP: BOP is in deficit when receipts of foreign exchange are less than payments of foreign exchange.​​​​​​​