CAUSES OF DISEQUILIBRIUM AND MEASURES TO CORRECT
TYPES OF DISEQUILIBRIUM:
1) Short- run Disequilibrium:
i. Such deficit occurs due to sudden increase in demand for foreign goods and services.
ii. This can be corrected by creating the required surplus or by offsetting the deficit.
iii. It may become chronic and such a persistent deficit will lead to depletion of foreign exchange reserves.
iv. This will reduce the country’s credibility and the ability to raise further loans.
2) Long- run disequilibrium:
i. Long run disequilibrium also called as secular disequilibrium.
ii. The IMF terms such disequilibrium as “fundamental disequilibrium.”
iii. Long run disequilibrium is caused by continuous excess demand for foreign exchange.
iv. Reasons for long run disequilibrium are excess imports for planned economic development, continuous increase in population compelling a country to import essential goods, domestic investment exceeding domestic savings, increase in the price of imports, decline in the demand for export due to technological improvement and change in habits, taste, income etc. in countries wherethese goods are exported.
3) Cyclical disequilibrium:
i. Disequilibrium in balance of payment may be caused by trade cycle.
ii. A country may be any phase of trade cycle phases like prosperity a or depression.
iii. Export may increaseduring recession or depression due to a decline in price.
iv. Usually discouraged during this period owing to reduced income.
v. Economic activities are subject to business cycles which have four phases as prosperity or boom, recession,depression and recovery.
vi. Disequilibrium is the result of the effects of business cycle at home as well as in other countries.
vii. Measures are primarily directed to control cyclical changes which in turn also help overcome disequilibrium in the balance of payment.
4) Structural Disequilibrium:
i. Structural disequilibrium in balance of payment is caused by structuralchanges occurring in some sectors of
the economy at home or abroad which may change the demand or supply relations of exports or imports or both.
ii. Exports of a country may decline if in the rest of the world demand is diverted to other commodities due to a change in fashion, taste, fashion, habits or income.
iii. Demand for raw material may decline either due to technological changes which reduce the raw material content or discovery of substitutes.
iv. A shortage or excess supply of these factors may change their prices and accordingly the commodity prices which in turn affect the exports
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