Equilibrium and Disequilibrium in Balance Of Payments

A country’s balance of payments is said to be always ‘balanced’ in the accounting sense so there would be no ‘imbalance’ in a country’s BOP. However, we come across the term ‘equilibrium’ or ‘disequilibrium’ in relation to a country’s BOP. This is because the term ‘balance’/ ‘imbalance’ is used in the accounting sense while the term ‘ equilibrium’ / ‘disequilibrium’ is used in the economic sense. Thus, while analyzing the equilibrium /disequilibrium in the balance of payments one has to consider the nature of international transactions in the BOP. The nature of international transactions could be autonomous or accommodating. 

Autonomous Transactions: Autonomous transactions are those transactions that take place regardless of the size of other items in the balance of payments. They are also called ‘above-the-line transactions.’ All the transactions in the current and capital account are autonomous because they are undertaken for business or profit motives and are independent of the balance of payments situations. They are the cause of the BOP situation. 

Accommodating Transactions: Accommodating transactions are those transactions that are undertaken deliberately to correct disequilibrium in the balance of payments. They are also called ‘below-the-line transactions’. They are the result of the balance of payments situation. The transactions in the official reserve account are of an accommodating nature undertaken by monetary authorities to bring balances in the balance of payments.

The distinction between autonomous and accommodating transactions is useful in defining equilibrium/disequilibrium (surplus/deficit) in the balance of payments.

(a) Equilibrium in BOP  –  A country’s balance of payments is said to be in equilibrium when its autonomous receipts (credits) are equal to its autonomous payments (debits). 

(b) Disequilibrium in BOP – A country’s balance of payments is said to be in disequilibrium when its autonomous receipts (credits) are not equal to its autonomous payments (debits). 

Disequilibrium in BOP could be in the form of surplus or deficit in the balance of payments. 

(1) Surplus in BOP – When the autonomous receipts (credits) are greater than autonomous payments (debits), the balance of payments will be in surplus or favourable. In other words, if total credits are more than total debits in the current and capital account (including errors & omissions), the net credit balance measures the surplus in the nation’s balance of payments. This surplus is settled with an equal amount of net debit in the official reserves account. 

(2) Deficit in BOP – When the autonomous receipts (credits) are smaller than autonomous payments (debits), the balance of payments will be in deficit or unfavourable or adverse. In other words, if total debits are more than total credits in the current and capital accounts (including errors & omissions), the net debit balance measures the deficit in the nation’s balance of payments. This deficit is settled with an equal amount of net credit in the official reserve account.