Causes of Balance of Payment Problems in Emerging and Developing Economies

2101 WordsFeb 12, 20129 Pages
INTRODUCTION: The balance of payment has been an important indicator of the growing economic activities in all countries. The purpose of this essay is to discuss factors that causes Balance of payment problems that are encountered by developing and emerging economies. This essay starts off with an introduction of the definition of B.O.P and the overview of its components. This is followed by an insight into the approaches used to explain deficits from the current account of the B.O.P. Furthermore, the causes of the problems were discussed. MAIN TEXT: The balance of payment has been an important indicator of the growing activities in all countries of the world. It shows the extent to which a country is developed technically and also…show more content…
While on the RHS, shows total expenditure, both from domestic and foreign sources. The above equation can further be formulated as: X – M = Y – (C + I + G) The LHS provides a statement of the balance of payment, whereas the RHS shows how this depends on the difference between domestic output (Y) and domestic expenditure. Starting off from a situation of payment equilibrium, an increase in domestic absorption relative to domestic output results in a payment deficit. More generally: Change in BP = Change in Y – Change in A. SHIFTS IN LM: MONETARY APPROACH: The monetary sector is largely ignored when discussing the absorption approach to the balance of payment, although it may be included on the basic assumption which says that money supply policy is used to stabilise interest rates. However, the monetary approach explains changes in the overall balance of payment exclusively in terms of domestic monetary disequilibria. It incorporates both the current and the capital account. There is a rightward shift in the LM as a result of increases in the domestic credit which causes payment deficit. Not only does this expansion cause nominal income and imports to rise, it also causes a fall in the interest rate, which leads

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