The Balance of Payments Irrelevance to a Market Economy - Essay Example

In a market economy, there exists no government influence and equilibrium in the deficit, and surplus in the balance of payments is achieved without government control. Disequilibrium or equilibrium in the balance of payments (BOP) refers to the balance of the account entries. Accommodating items, for instance, use of special drawing rights, borrowing from the IMF, and drawing from the reserves held by the Central Bank of foreign currencies are not included (McConnell & Brue, 2013). Excluding these accommodating items yields neither surplus nor deficit in the overall balance of international payments hence causing equilibrium. Conversely, a more vital concept of the balance of payments equilibrium is the basic balance, which is based on the presence of autonomous items in a BOP.  The autonomous items include items that cannot be influenced easily by the Government and are determined by certain long-term factors. Basic balance regards autonomous, the long-term capital shifts both on Government or private account held in the capital account and excludes items in the current account balance of payments.

Autonomous movements cancel out over some suitable period and therefore there lacks the need for compensatory changes and in such a case the balance of payments is said to be in equilibrium (McConnell & Brue, 2013).