Balance of Payments Deficit and Surplus:

Balance of Payments Deficit:

It refers to net deficit on current and capital accounts. Some possible causes of balance of payments deficit are:

(i) Declining export earnings either due to falling export volume or export price.

(ii) Rising import bills owing to rising import prices.

(iii) Rising domestic prices may discourage exports because our exportables will become non price competitive in the world market. Also rising domestic prices may encourage imports because imports will become relatively cheap.

(iv) Overvalued currency: When a country's currency is overvalued it encourages flight of capital and reduces the inflow of autonomous capital.

A deficit account may be financed by:

(i) Using a country's gold reserves and foreign currency reserves.

(ii) Increasing the assets of foreigners in the country.

(iii) Selling investment overseas.

(iv) Borrowing from foreign governments, banks or the IMF, etc.