The correct answer is Option (3) → Low Domestic price.
A disequilibrium in the Balance of Payments (BoP) occurs when a country's international payments (imports, exports, capital flows) are not balanced, often leading to a deficit or surplus. Therefore, any factor that disturbs the balance — either positively (surplus) or negatively (deficit) — causes disequilibrium.
In this question
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Political instability – Yes, Political instability, such as frequent changes in government or civil unrest, can discourage foreign investment (capital inflows) and encourage capital flight (capital outflows), leading to a deficit in the capital account and thus disequilibrium in the BoP.
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Large imports – Yes, When a country's imports significantly exceed its exports, it results in a trade deficit, which is a major component of the current account deficit. A persistent current account deficit leads to an overall BoP disequilibrium.
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Low domestic price – No. Low domestic prices, especially relative to international prices, would generally make a country's exports more competitive and imports less attractive. This would tend to improve the trade balance by encouraging exports and discouraging imports, thereby moving the BoP towards equilibrium or creating a surplus, rather than causing a disequilibrium (specifically a deficit).
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Change in taste and fashion – Changes in consumer tastes and fashion can significantly shift demand patterns. If domestic consumers develop a stronger preference for imported goods, it will increase imports. Conversely, if foreign consumers lose taste for a country's exports, it will decrease exports. Both scenarios can lead to an imbalance in trade, causing disequilibrium in the BoP.
Note: The question asks, "Which of the following is not a cause of disequilibrium in the Balance of Payments?" However, the term disequilibrium in the Balance of Payments refers to any imbalance, which can be either a deficit (excess of payments over receipts) or a surplus (excess of receipts over payments). All four options listed can lead to such an imbalance:
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Political instability, large imports can lead to a BoP deficit.
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Low domestic prices can lead to increased exports and reduced imports, potentially causing a BoP surplus.
- Change in taste and fashion can result in either a deficit or surplus, depending on consumer preferences.
Since both deficit and surplus represent disequilibrium, all four options technically cause BoP disequilibrium. However, as per the NTA key, Option 3 (Low Domestic Price) is marked correct, likely because it leads to a favourable surplus, which is sometimes not viewed as a harmful imbalance. This creates ambiguity in interpretation, as the question does not clarify whether it refers only to adverse disequilibrium (deficit) or any form of imbalance. |
