CBSE Class 12-commerce Answered

Following are the reasons or causes of deficit in Balance of Payments:

1. Developmental activities: Developing countries depend on developed nations for machines, technology and other equipment’s as they are not able to produce them domestically. This leads to increase in imports and this results in deficit in BOP.

2. Inflation: High rate of inflation in the domestic economy makes foreign goods relatively cheaper as compared to domestic goods. This increases the demand for imports and thereby can cause deficit.

3. Change in demand: If the demand for domestic goods fall in the foreign markets, this leads to fall in exports. And if our payments for imports is in excess of receipts for exports it will cause deficit in BOP.

4. Demonstration effect: When people of under developed and developing countries come in contact with the lifestyle of other foreign countries, their imports increase to match the foreign pattern of consumption. This can have an adverse effect on BOP.

5. Import of services: Underdeveloped countries import capital and other services from developed counties. This results in deficit BOP.