BOP has to balance, however surpluses or deficits on its individual elements may create imbalances. There are concerns about deficits in the current account. The types of deficits that typically raise concerns are:
•A visible trade deficit in case of a nation that is importing significantly more goods than it exports.
•An overall current account deficit.
•A basic deficit which is the current account plus FDI, excluding short-term loans and the reserve account.
Reasons behind BOP Imbalances
Conventionally, current account’s factors are thought to be the primary cause behind BOP imbalances – these include the exchange rate, the fiscal deficit, business competitiveness, and private behavior.
Alternatively, it is believed that the capital account is the major driver of imbalances where a global savings satiation created by the savers in surplus countries goes ahead of the present investment opportunities.
BOP defines the reserve asset as the currency or other standard value that is used for their foreign reserves. The reserve asset can either be gold or the US Dollar.
A BOP crisis, or currency crisis, is the inability of a nation to pay for the necessary imports and/or return the pending debts. Such a crisis occurs with a very quick decline of the nation’s currency value. Crises are generally preceded by large capital inflows.