3 Important Causes of Deficit in Balance of Payments

• These factors can be divided into three groups:
• (i) Developmental activities:
• (ii) High rate of inflation:
• (iii) Cyclical fluctuations:
• (iv) Change in Demand:
• (v) Import of Services:
• (i) Political Instability:
• (ii) Political disturbances:

What are the effect of balance of payment deficit?

A deficit in the balance of payments leads to a higher demand for foreign currency to the detriment of national currency which would depreciate in this situation. However, an exceeding account balance involves a high amount of foreign currency for which the national currency would be exchanged.

Why does a country have a balance of payments deficit?

A balance of payment deficit in a country can arise if said country imports more capital, goods and services than it exports. Balance of payment deficit is given by – (Current account + capital account receipts) < (current account + capital account payments)

What causes a change in the balance of payments?

An increase in exports cause the national income to rise by many times through the operation of the foreign trade multiplier. The foreign trade multiplier expresses the change in income caused by a change in exports. Ultimately, the deficit in the balance of payments is removed when exports rise faster than imports. Measure # 7.

Why is a high current account deficit harmful to the economy?

Why a current account can be harmful to the economy. A very high balance of payments deficit may, at some point, cause a loss of confidence by foreign investors. Therefore, there is always a risk, that investors will remove their investments causing a big fall in the value of your currency (devaluation).

What causes a deficit in the BOP account?

This leads to increased levels of imports, thereby, resulting in a deficit in the BOP account. When there is inflation in the domestic economy, foreign goods become relatively cheaper as compared to domestic goods. It increases imports which causes a deficit in the BOP.