What are the Main Types of Disequilibrium in Balance of Payments?

The main types of disequilibrium in the balance of payments are as given below:

1. Cyclical Disequilibrium:

Cyclical disequilibrium in the balance of payments arises due to business cycles. It is caused (a) by cyclical patterns of income, or (b) by different income elasticity's, or (c) by different price elasticity's.

These factors bring changes in the terms of trade as well as growth of trade which, in turn, lead to a deficit or surplus in the balance of payments.

When prices rise in prosperity, a country with more elastic demand for imports will experience a decline in the value of imports, thus leading to a surplus in the balance of payments. Conversely, as prices decline in depression, more elastic demand will increase imports and cause a deficit in the balance of payments.

These tendencies may, however, be offset by the effects of income changes. High incomes during prosperity increase imports and low incomes during depression reduce imports.

2. Secular Disequilibrium:

Secular or long-term disequilibrium in balance of payments occurs because of long-seated and deep-rooted changes in the economy as it moves from one stage of growth to another,

(a) In the initial stages of economic development, domestic investment exceeds savings and imports exceed exports. Disequilibrium occurs due to lack of funds to finance the import surplus,

(b) Then comes a stage when domestic savings tend to exceed domestic investment and exports exceed imports. Disequilibrium arises because the surplus savings exceed investment opportunities abroad,

(c) At a still later stage, domestic savings tend to equal domestic investment and long-term capital movements on balance become zero.

3. Structural Disequilibrium:

Structural disequilibrium in the balance of payments occurs when structural changes in some sectors of the economy alter the demand and supply forces influencing exports and imports. According to Kindleberger, structural disequilibrium may be of two types:

(i) "Structural disequilibrium at the goods level occurs when a change in demand or supply of exports or imports alters a previously existing equilibrium or when a change occurs in the basic circumstances under which income is earned or spent abroad, in both cases without the requisite parallel changes elsewhere in the economy."

(ii) "Structural disequilibrium at the factor level results from factors which fail to reflect accurately factor endowments i.e., when factor prices, out of line with factor endowments, distort the structure of production from the allocation of resources which appropriate factor prices would have indicated."

Structural disequilibrium is caused by changes in technology, tastes and attitude towards foreign investĀ­ment. Political disturbances, strikes, lockouts, etc., which affect the supply of exports, also cause structural disequilibrium.

4. Fundamental Disequilibrium:

The term fundamental disequilibrium has been originally used by the I.M.F., to indicate a persistent and long-term disequilibrium in a country's balance of payments. Fundamental disequilibrium is generally caused by dynamic factors and particularly leads to chronic deficit in the balance.

The main causes of fundamental disequilibrium are: (a) excessive or inadequate internal demand for foreign goods; (b) excessive or inadequate competitive strength in the world market; (c) excessive capital movements.