When does the problem of unfavourable balance of payment arise?

Correct option is D

The correct answer is (d) When imports are greater than exports

The problem of unfavorable balance of payments (BoP) arises when a country’s imports exceed its exports, leading to a trade deficit. This creates a situation where more foreign currency flows out of the country than flows in, potentially destabilizing the economy.

Key Details:

Unfavorable BoP:

• Occurs in the current account of the BoP.
• Results from an imbalance between exports of goods and services and imports of goods and services.

Consequences:

• Depreciation of the domestic currency due to higher demand for foreign currency.
• Increased reliance on foreign reserves or borrowing to finance the deficit.
• Potential economic instability if the deficit persists over time.

Causes:

• Excessive reliance on imports for goods, services, or raw materials.
• Decline in the competitiveness of domestic products in global markets.
• Economic policies that encourage higher consumption of imported goods.

Additional Information:

• When exports decrease: While this can contribute to an unfavorable BoP, the primary issue arises when imports exceed exports.
• When exports increase: This improves the BoP, as it generates more foreign exchange.
• When imports decrease: This improves the BoP by reducing the outflow of foreign exchange.