Equilibrium and Disequilibrium in the Balance of Payments
If on the current account, the value of exports is equal to the value of imports, the balance of payments is said to be equilibrium. If the two values are not equal, the balance of payments is in disequilibrium. This could be due to a trade surplus with the value of exports exceeding that of imports or due to a trade deficit with the value of imports exceeding that of exports.
In either case, a balance of payments disequilibrium cannot last indefinitely. For if this is due to a trade deficit, the country will try and move it. This is because a persistent trade deficit i.e. a fundamental disequilibrium poses several problems for an economy, namely:
- In short run a deficit allows a country's peoples to enjoy higher standard of living form the additional imports that would not be possible from that country's output alone in the longer term the decline of the country's industries in the face of international competition will inevitably result in lower living standards.
- A persistent trade deficit means that the country's foreign exchange reserves are being run down and so it its ability to pay for its imports and settle international debts.
- Also, a persistent balance of payments trade deficit is regarded as a sign of failure in the country's trade with other countries, and is therefore not politically desirable.