It is evident that balance of payments is always balanced just like balance sheet of a business concern. The current account may be understood as the income and expenditure account or the profit and loss account of a business concern. Any surplus or deficit in the current account is shown in the capital account to make the latter balance. The difference of total receipts and payments must tally with the surplus or deficit in the current account. In this way, the capital account shows as to what the country owes and what the country is to receive.
Disequilibrium In The Balance Of Payments Of A Country
When we take about the balance of payments of a country, it necessarily means the balance in of payments on current account. The total balance i.e. of current account and capital account taken together will always be equal just like a trial balance of a business concern. Balance on current account will either show a deficit or surplus.
If there is surplus in the balance of payments, it means more inflow of income than outflow. It implies more economic activities and more employment for the people. A deficit, on the contrary, implies a reverse impact on the economy.
It may be pointed out here that, the balance of payments of country always shows either a surplus or a deficit. It is in equilibrium when there is no surplus or deficit on current account of the balance of payments. This situation is very rare and hardly exists in practice.
In other words, a position of disequilibrium exists when the demand for foreign exchange exceeds its supply or vice-versa demand for foreign exchange exceeds its supply, there is said to have a deficit in the balance of payments, The reserve will be a situation of surplus in balance of payments. Whether the balance is in surplus or in deficit, there exist disequilibrium in balance of payments which is not desirable for long and should be corrected very soon.