A balance of payment deficit is a situation in which the payments a country makes are more than the payments it receives. Essentially, more money leaves the country than is brought into it, and the country suffers a decrease in its supply of money. Often, a country can work to correct its balance of payment problems by increasing its exports and reducing its imports.
There are many things that may contribute to a deficit in the balance of payment. For example, high inflation may negatively affect exports but make imports more attractive. When the country is spending more to import products than it is exporting, this can result in a deficit. Sometimes, a recession in another country has a negative effect. For instance, if a country’s trade partner is in a recession, it may purchase fewer exports.
The overvaluing of a country’s currency may also contribute to a deficit. When a currency is overvalued, this typically translates into less expensive imports and more importing. On the other hand, exports are typically unable to compete well in such a situation. As a result, imports may rise while exports fall.
A country’s economic growth can cause a balance of payment deficit as well. For example, if a country experiences economic growth and its consumers can afford to spend more, this is usually a good thing. In the event that the country cannot produce enough to keep up with consumer demand, however, this may lead to an increase in imports.
There are many ways for a country to tackle a balance of payment problem. It can reduce its currency value, as well as try to increase exports and decrease imports. In fact, reducing currency value may help with importing and exporting, as a country’s lowered currency value may encourage exportation while also making it more difficult to import. When currency value is low, imports become more expensive.