What is the Balance of Payments? What must it always equal? What are the differe

Question

What is the Balance of Payments? What must it always equal? What are the different parts of the Balance of Payments? What are the types of exchange rates that country might have? Example: If a country's central bank does not attempt to intervene in the market to maintain a certairn exchange rate, what would we call that? If a central bank does intervene to keep a certain exchange rate over a long period of time, what do we call that? If the exchange rate starts at 1.2 Euros/Dollar, and then changes to 1.1 Euros/Dollar, would you say that the dollar has appreciated or depreciated in value? (Hint: Think in terms of how much of the other currency each dollar can buy) 0 FS 19 8 3

Explanation / Answer

Balance of payments includes all payments and receipts from rest of the world and the economy. It is the difference between the currency spent and currency earned in the foreign market. It includes all transfers from its residents to the non residents outside the coutry, assets and liabilities of the country in another country, transfers and gifts of a specified time period. The balance of payment should always be equal to zero. As for recording all the transaction, double entry system. Thus the all the transactions hould be set off and the BOP should be equal to zero.

The BOP has three components:- Financial accout, current account and capital account. Current account includes exports, imports, investment income like rent, interest etc. Financial accout includes the ownership of the country in other counteries of shares, securities, bonds, gold etc. And the capital account includes the invetment of funds of US in other counteries and other counteries funds in US.

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