what do we mean by disequilibrium in bop?

Question

bop stands for balance of payment .

Answer 1

Usually we mean a current account deficit that is large relative to GDP. This used to be vitally important in the days of fixed exchange rates and/or barriers to capital movements. In advanced countries it is much less important nowadays because their payments flows on capital account are much larger in both directions than those on current account.

By definition, like a balance sheet on company accounts, the balance of payments must balance. (Recorded balances don't but only because of counting errors.) But HOW? If a small economy with a free exchange rate such as Indonesia runs a large current account deficit it has to raise interest rates to atttract capital inflows and as we saw some years ago if people lose confidence in that country it has to raise them to draconian levels, or, as Indonesia actually did, allow the exchange rate to plummet dramatically. This has major costs for the economy in jobs, recession, high debt service payments to foreigners, etc, so governments try to avoid that kind of disequilibrium.

A large current account surplus is also a disequilibrium, much less of a pressure situation for the central bank of that country but n/l a source of stresses and strains if it persists -- see Japan some years ago and China more recently.

Answer 2

Definition Of Disequilibrium

Answer 3

Sources of BOP Disequilibrium

1. Seasonal disequilibrium (variation in import and export activities, natural disasters, labor strikes, etc.)
2. Cyclical disequilibrium (more serious, due to changes in income and production)
3. Structural disequilibrium (more lengthy, strikes at the heart of economic policies, could be sue to a sudden shift in prices of major international commodities)
4. Speculative disequilibrium ( result of short-term capital movement)

Methods to Correct disequilibrium in BOP

Internally

1. Changes in exchange rate
2. Changes in income policy
3. Qualitative and quantitative restrictions on imports

Externally

1. Other government's intervention
2. Help from the IMF
3. Relief from foreign banks

Answer 4

Both approaches emphasizes the role of money and asset trade (not trade in goods and services) as the primary determinant of equilibrium:

•Balance of Payments (BOP) under a fixed exchange rate

•Exchange rate in a flexible rate system

Equilibrium (BOP) here means the sum of categories I, II, and III transactions is zero, i.e, there is no official reserves flow.

Monetary Approach: emphasizes the relationship between money demand and supply.

Portfolio Approach: include other assets in addition to money.

Answer 5

OK, really super short answer - it's like your check book, you have to balance what came in and what went out over that time. Too much going out is going to mean that you'll be broke soon. Too little going out and you'll suffer from economic afflictions such as hyperinflation and unsustainable growth. Actually that last part applies only if you're a country.

Answer 6

DIFFERENCE IN IMPORTS & EXPORTS.