A Study on

Causes for Disequilibrium in Balance of Payment

A Mini Project Report in Business Environment Submitted to JNTU,

Kakinada in Partial Fulfilment for the Award of the Degree of

MASTER OF BUSINESS ADMINISTRATION

Submitted ByAnusha Gopisetty

(Reg. No. 13491E0007).

DEPARTMENT OF MASTER OF BUSINESS ADMINISTRATIONQIS COLLEGE OF ENGINEERING & TECHNOLOGY

An ISO 9001: 2008 Certified Institution and Accredited by NBA (Affiliated to JNTU, Kakinada and Approved by AICTE)

Vengamukkapalem, Pondur RoadONGOLE –523 272.

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CONTENT

S.NO PARTICULARS PAGE NO1 Abstract 32 Introduction 33 Definition 34 Keywords 35 Need to study 36 Scope of study 37 Objectives 38 Methodology 39 Review of literature 310 Causes of disequilibrium in balance of payment 411 Conclusion 512 Reference 5

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Abstract:

The paper shows that if long-run balance of payments equilibrium on current account is a requirement then a country's long run growth rate can be approximated by the ratio of the growth of exports to the income elasticity of demand for imports. The model fits well the experience of eighteen OECD countries. It is output, not relative prices, that adjusts the balance of payments, contrary to the neoclassical orthodoxy. Growth can be demand contained by the balance of payments.

Introduction:

Disequilibrium refers to the imbalance in the balance of payment in the form of surplus or deficits. Most countries experience deficit in their trade account. This is corrected through a surplus in services. The current account is the most important part of the balance of payments. Very few countries enjoy a surplus on this account. The deficit on this account requires to be covered by a surplus on capital account.

Keywords: Balance of payment; Disequilibrium.

Definition:

A situation where internal and/or external forces prevent market equilibrium from being reached or cause the market to fall out of balance. This can be a short-term by product of a change in variable factors or a result of long-term structural imbalances. .

-- (KINDLY BERGERS)--

Need to study:

The balance of payments of a country said to be in equilibrium when the demand foreign exchange is exactly equivalent to the supply of it.

Scope of study:

The balance of payment is disequilibrium when there is either surplus or a defect in the balance of payments. When there is a defect of balance of payments the demand foreign exchange exceeds the demand for it

Objectives:

To know about causes of disequilibrium in balance of payment.

Methodology:

The project is descriptive & exploratory but constructive in nature.

The secondary data is collected through books, journals, magazines

The primary data is collected through descriptive with acumination expect.

Review of literature:

Balance of payment refers to the recording of all economic transactions of given country with rest of world as a result of such transactions. In the words of kindleberger the bop of a country is a systematic record of all economic transactions between its residents and residents of foreign country. Sometimes it may turn out to

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be otherwise, in practices because of several reasons, especially due to differences in the value of exports and imports.

Causes for disequilibrium in balance of payment:

Various causes of disequilibrium in the balance of payments or adverse balance of payments are as follows:

1. Development Schemes:

The main reason for adverse balance of payments in the developing countries is the huge investment in development schemes in these countries. The propensity to import of the developing countries increases for want of capital for industrialization. The exports, on the other hand, may not increase because these countries are traditionally primary producing countries. Moreover the volume of exports may fall because newly created domestic industries may need them. All this leads to structural changes in the balance of payment resulting in structural disequilibrium.

2. Price-Cost Structure:

Changes in price-cost structure of export industries affect the volume of exports and create disequilibrium in the balance of payments. Increase in prices due to higher wages, higher cost of raw materials, etc. reduces exports and makes the balance of payments unfavorable.

3. Changes in Foreign Exchange Rates:

Changes in the rate of exchange are another cause of disequilibrium in the balance of payments. An increase in the external value of money makes imports cheaper and exports dearer; thus, imports increase and exports fall and balance of payments become unfavourable. Similarly, a reduction in the external value of money leads to a reduction in imports and an increase in exports.

4. Fall in Export Demand:

There has been a considerable decline in (his export demand for the primary goods of the underdeveloped countries as a result of the large increase in the domestic production of foodstuffs raw materials and substitutes in the rich countries. Similarly, the advanced countries also find a fall in their export demand because of loss of colonial markets. However, the deficit in the balance of payment due to the fall in export demand is more persistent in the underdeveloped countries than in the advanced countries.

5. Demonstration Effect:

According to Nukes, the people in the less developed countries tend to follow the consumption patterns of the developed countries. As a result of this demonstration effect, the imports of the less developed countries will increase and create disequilibrium in the balance of payments.

6. International Borrowing and Lending:

International borrowing and lending is another reason for the disequilibrium in the balance of payments. The borrowing country tends to have unfavourable balance of payments, while the lending country tends to have favourable balance of payments.

7. Cyclical Fluctuations:

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Cyclical fluctuations cause cyclical disequilibrium in the balance of payments. During depression, the incomes of the people in foreign countries fall. As a result, the exports of these countries tend to decline which, in turn, produces disequilibrium in the home country's balance of payment.

8. Newly Independent Countries:

The newly independent countries, in order to develop international relations, incur huge amounts of expenditure on the establishment of embassies, missions, etc. in other countries. This adversely affects the balance of payments position.

9. Population Explosion:

Another important reason for adverse balance of payments in the poor countries is population explosion. Rapid growth of population in countries like India increases imports and decreases the capacity to export.

10. Natural factors:

Natural calamities, such as droughts, floods, etc., adversely affect the production in the country. As a result, the exports fall, the imports increase and the country experiences deficit in its balance of payments.

Conclusion:

The above project is explained by the causes of disequilibrium in balance of payment explained by the causes of disequilibrium these are natural explosion, population explosion, newly independent countries, development scheme, Price-Cost Structure, Changes in Foreign Exchange Rates, Fall in Export Demand,Demonstration Effect, International Borrowing and Lending, Cyclical Fluctuations are explained above.

Reference

1. Shaikh Saleem: “Business Environment”, Pearsons, New Delhi,

2. Veena Keshav Pailwar: “Economic Environment of Business”, PHI Learning, New Delhi, 2012

3. Rosy Joshi, Sangam Kapoor: “Business Environment”, Kalyani Publishers, New Delhi, 2011.

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