Balance of Payments and Exchange Rates Essay Example | Topics and Well Written Essays - 1500 words

Balance of Payments and Exchange Rates - Essay ExampleThe balance of payments comprises all of the economic transactions between members of one country and members of all other countries. This includes any trade of goods and service, investments, payments and loans. The balance of payments is made up of several accounts. The current account includes goods trade, services trade, income and transfers of ownership. The capital account includes transfers of assets and acquisitions. The financial account is made up of direct investments into the country, portfolio investments, and various investments. In order to balance out the current and financial accounts should origin each other (Moffett, Stonehill, Eiteman 2006, 73). When there is more specie coming in than going out balance of payments will be in surplus, and when more money has gone out than come in there will be a deficit. This is what can affect re-sentencing range as we will externalize below.Exchange localizes are the v alue of one countrys up-to-dateness in relation to that of another countrys currency. In other words how much is your unit of currency worth in another countrys unit of currency. Exchange rates reflect the supply and demand for a countrys currency in the world market. However or so governments, depending on their monetary insurance, may seek to ensure their currency has a certain value in the market. A country with a fixed exchange rate policy maintains a set level for their currency by using reserves to either buy up excess currency so flood the market with currency when there is a demand. Floating exchange rate countries let the market determine their exchange rate this is normally through by a country with a strong economy. A country operating on a managed float uses factors such as interest rates in order to influence the price or their currency in the market and keep it around a certain level. A governments monetary policy can influence the effect that balance of payments has on exchange rates.LinkagesThere are significant links between a countrys balance of payments and exchange rates. As Layton, Robinson and Tucker (2005, 56) point out Each transaction recorded in the balance of payments requires an exchange of one countrys currency for that of another. The level of a countrys exchange rate has an impact on the balance of payments and vice versa. Surplus in the balance of payments usually means that the demand for a countrys currency is greater than supply on the other hand a deficit in balance of payments indicates there is too much of a countrys currency in the market. How significant an impact depends on a countrys exchange rate regime (Moffett, Stonehill, Eiteman 2006,