Exchange Rate

THE INFLUENCE OF EXCHANGE RATE ON BALANCE OF PAYMENTS

Contents

INTRODUCTION 3

Exchange Rates 3

Parity Conditions 4

Balance of Payment Approach 4

The Asset Market Approach 5

Difficulties in Predicting the Exchange Rate 6

Balance of Payments 7

Current Account 8

Capital Account 8

Official Reserves 9

Errors and Omission 9

Total of Balance of Payment 10

Influence of Exchange Rate on BOP 10

Current BOP of the USA 12

Balance of Balance of Payment 12

Balance of Current Account 13

Balance of Capital Account 14

Works Cited 15

IMPACT OF EXCHANGE RATE ON BALANCE OF PAYMENTS

INTRODUCTION

In this era of improved communication, the world has truly become flat. Countries have opened up their economies and have allowed people from other countries to import/export goods from/to their country. Foreign nationals are also allowed to set up business in the home country. This has resulted in increased importance on the exchange rates and the effect it has on the balance of payments.

Before we consider the impact of exchange rates on the balance of payments let us first individually understand what an exchange rate means and how it is determined and we will also look at what is a balance of payments and what are the various components of balance of payments.

Exchange Rates

An exchange rate is an important macro economic indicator of the functioning of the national economy with respect to the world economy. The exchange rate is an important area which the central bank considers while framing the monetary policy as the exchange rate is an important indicator of the credibility of the national monetary system. The exchange rate is particularly important where the economy has been liberalized and there are a lot of transactions taking place with other countries.

The determination of exchange rates is a complex process. The exchange rate is influenced by numerous factors such as imports and exports, inflation rate, rate of interest,...