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Balance of payments of disequilibriumIf over a period of time, a country's receipt

from its exports of goods and services and

from ordinary capital movements fall short of
its import and other payments abroad, the
country is said to be in balance of payments
Its plight may be reflected by several
indicators, such as falling international
reserves, import and exchange controls, a
depreciating exchange rate, and foreign
borrowing for compensatory purpose.
Types of disequilibrium
1. Short run or transient
2. Long run or deep seated.
Short run types of problem may arise
1. Poor crop year either due to any of the
common factors: as plant pests and
diseases, poor weather condition, and
others which result in a drop in exports
and/or an increase in imports in order
to provide the needs of the people for
domestic consumption. 2. A
depression in other country which
causes a fall in exports obviously
because the other country may be
forced to curtail imports.
2. Deep seated problems may be result
of some fundamental economic
dislocations, such as: 1. Low
productivity due to war devastation. 2.
Loss of investments. 3. Low
productivity due to low level of
economic development.
Disequilibrium or instability of the
foreign balance may occur as a result of
deliberate policies pursued by government
as when a country imposes an import tariff,
an export subsidy or a direct restriction by
quota or embargo upon imports or exports;
or as a result of government trading or
exchange control policy. Such changes
inevitably result however in retaliatory
Plight of underdeveloped countries- In
connections with balance of payments

difficulties confronting a number of countries

of the world, it could be said correctly that
any country that earns a substantial portion
of its total income from exports like the
philippines is exposed to the vicissitudes of
international trade. This is especially so
when they depend upon the so-called
traditional exports. If all underdeveloped
countries exert their utmost best to increase
their current staple exports, they might end
up poorer that they were while advance
countries would reap the benefits.
Reasons behind adverse long run
developments against the primary
exporting countries
On the demand side, exports of primary
commodities have been adversely affected
by the long term changes in volume and
composition of the demand for imports in the
industrial countries due to the rising levels of
output and income as well as technological
changes and by tremendous gains in
agricultural production in the industrial

Structural imbalance- as may be briefly

noted can be caused by a change in tastes or
a change in the competitive position of a
natural product arising mainly from
technological developments.
On the supply side, exports have been also
affected adversely by in-roads of
consumption of goods by the relatively rapid
growth in population as well as the use of
raw materials by expanding countries of the
region. In the case of imports, the most
important demand factor was the growth in
population and the industrialization efforts in
the primary exporting countries of the world.
The decline in demand for primary
products of underdeveloped countries
1. Increased in competition between primary
products, synthetics and other new
2. Economies in the use of raw materials, so
that smaller amount of primary products is
needed per unit of final output

3. Protection of domestic primary production

in the advanced nations, denying markets to
the producers in underdeveloped countries.

4th Method : Proposes the devaluation of the

countrys currency
International reserves
International reserves are any kind of reserve funds

Achieving External Balance

Balance of Payments Problems

that can be passed between the central banks of

different countries. International reserves are an
acceptable form of payment between these banks.

1. Changes in long term borrowing and grants;

The reserves themselves can either be gold or else

2. Changes in the level of domestic activities

a specific currency, such as the dollar or euro.

3. Imposition of changes in controls over foreign

exchange transactions, and


4. Changes in relative prices

Four Major Ways to solve balance of payments
1st Method : Entry of Foreign investments as well as
grants or aid.
2nd Method : Reducing the demand for imports
while expanding the supply of products for the
export market.
3rd Method : Imposition of exchange restriction or
increasing their intensity.

Is a negative balance (or an excess of debits over

credits on account of certain transactions.
Is a positive balance on account of the same