Factors affecting bop. 13 Causes of Disequilibrium in Balance of Payments (BOP) 2022-10-16
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The balance of payments (BOP) is a record of a country's transactions with the rest of the world. It includes all payments and receipts for goods, services, income, and financial transfers. The BOP can be in surplus, meaning that a country is exporting more than it is importing, or in deficit, meaning that it is importing more than it is exporting.
There are several factors that can affect a country's BOP. These include:
Economic growth: A country's economic growth can affect its BOP by influencing its demand for imports and exports. For example, if a country's economy is growing rapidly, it may have increased demand for imported raw materials, capital goods, and consumer goods, which can lead to a BOP deficit. On the other hand, if a country's economy is slowing down, it may have reduced demand for imports, leading to a BOP surplus.
Exchange rates: The exchange rate is the price of one currency in terms of another. A country's exchange rate can affect its BOP by influencing the demand for its exports and imports. For example, if a country's currency depreciates (loses value) relative to other currencies, its exports may become more competitive and its imports may become more expensive, leading to a BOP surplus. Conversely, if a country's currency appreciates (gains value), its exports may become less competitive and its imports may become cheaper, leading to a BOP deficit.
Interest rates: Interest rates can affect a country's BOP by influencing the demand for its exports and imports. Higher interest rates can make a country's exports more attractive to foreign investors, as they can earn a higher return on their investments. This can lead to a BOP surplus. On the other hand, lower interest rates can make a country's imports more attractive, as they become cheaper to finance, leading to a BOP deficit.
Government policies: Government policies can also affect a country's BOP. For example, trade policies, such as tariffs and quotas, can influence the demand for a country's exports and imports. Fiscal policies, such as tax rates and government spending, can also affect a country's BOP by influencing its demand for imports and exports.
Natural disasters and political instability: Natural disasters, such as earthquakes and hurricanes, can disrupt a country's production and trade, leading to changes in its BOP. Political instability, such as civil unrest and conflict, can also affect a country's BOP by disrupting its trade and investment.
In conclusion, the balance of payments is influenced by a variety of factors, including economic growth, exchange rates, interest rates, government policies, and natural disasters and political instability. Understanding these factors can help policymakers and businesses better predict and manage a country's BOP.
Trade Deficit: Definition, Causes, and Effects
Such structural changes include the development of alternative sources of supply, the development of better substitutes, the exhaustion of productive resources, the changes in transport routes and costs, etc. Kimberly Amadeo is an expert on U. These items are such that no reverse flow occurs. In case of the demand elastic, the effect on the supply of the domestic currency would depend the effect on the domestic currency value of imports. Causes of disequilibrium in balance of payments Any disequilibrium in the Balance of payments arises owing to a large number of causes of factors operating simultaneously. As these transactions are not recorded in the customs office unlike merchandise trade we call them invisible items. Structural Disequilibrium: Structual changes in the economy may also cause balance of payments disequilibrium.
What is BOP and explain the factors affecting BOP?
Symbolically, When the B is positive, it is called a Favourable balance of payments. From the model, a research agenda of five propositions are drawn for future research. Check out the In Short, balance of Payments refers to the transaction between countries. Offsets to current economic values that are offered or obtained without a cost are also addressed. These are: Development Disequilibrium: Large-scale development expenditures usually increase the purchasing power, aggregate demand and prices, resulting in substantially large imports. The significance of a deficit or surplus in the BOP has changed since the advent of floating exchange rates.
By all economic transactions we mean transactions of both visible goods merchandise and invisible goods services , assets, gifts, etc. Imports tie into another concept- currency valuation. Thus, the J-curve theory, states that a decline in the value of home currency should be followed by a temporary worsening in the trade deficit before its longer term improvement. Foreign exchange reserves are amassed by central banks such as the Reserve Bank of India and enhances the buying power of the country which in turn affects the BOP. Transactions in which domestic residents either purchase assets goods and services from abroad or reduce foreign liabilities are considered uses outflows of funds because payments have to be made for these transactions. It shows the receipts from trade.
What is balance of payments and factors affecting balance of payments?
The fact that the current and capital account balances do not sum to zero will automatically in theory alter the exchange rate in the direction necessary to obtain a BOP near zero. But in some cases the current account balance may improve because the production in the economy has also increased and export surplus is generated. Demonstration Effect Demonstration effect is another most important factor causing the deficit in the Balance of payments of the country, especially of an underdeveloped nation. In the similar fashion, a government may impose controls on the free movement of capital. It leads to a deficit in the BOP. Bureau of Economic Analysis. The changes in foreign ownership of domestic assets and domestic ownership of foreign assets are tracked in this account.
What is the Balance of Payment? Explain the factors affecting the BOP.
Unfavorable Balance of Trade Import exceeding Exports- huge development and investment programs in the developing economies are the root causes of the disequilibrium in the BOP of these countries. All transactions involving economic values that occur between resident and non-resident entities are included in the current account except from those in financial items. Hence, other things remaining the same, an increase in the standard of living and hence, an increase in the incomes of the residents of such an economy will result in an increase in the exports of the domestic economy Once again, this would increase the demand for the local currency. A change in domestic interest rates is an attempt to alter capital account balance, especially the short-term portfolio component of these capital flows, in order to restore an imbalance caused by the deficit in current account. A balance of payments deficit is another word for this. Since goods often lose their resale value post use, this puts the ledger in the red.
13 Causes of Disequilibrium in Balance of Payments (BOP)
Another factor is the additional risk thataccompanies these returns. There may be similar money inflow i. The current account is usually divided in three subdivisions: ADVERTISEMENTS: The first of these is called visible account or merchandise account or trade in goods account. Components of BOP Accounts: According to the broad nature of the transactions concerned, the BOP of a country is divided into two main parts: i the current account, and the ii capital account. At the same time, production costs are very high because of the higher wages.
What is Balance of Payments and how is it affected?
It is obviously important for a government to maintain significant foreign exchange reserve balances to allow it to intervene effectively. Higher the diversification benefits, higher the inflows. This impact is different from the previous one. Real exchange rate may be lowered by devaluation of currency. The finished manufactured goods are counted as imports when they're shipped back to the country.
Financial account This is a record of all transactions for financial investment. An increase in prices of imported goods relative to goods produced at home may discourage imports and improve the current account balance. Also internal buying power increases and domestic consumers will have an increased appetite to import. BALANCE OF PAYMENTS Balance of payments is an accounting record of the transactions between the residents of one country and the residents of the rest of the world over a given period of time. Since BOP always balances in theory, all debits must be offset by all credits and vice versa.
