Approaches of BOP.pdf

**Traditional Approach to Balance of Payments (BOP):**
The traditional approach views the BOP as an accounting statement and emphasizes maintaining a balance between the current account and the capital and financial account. It focuses on the current account balance, often under a fixed exchange rate system, and employs policy responses like exchange rate adjustments and import controls to address BOP imbalances.

**Modern Approach to Balance of Payments (BOP):**
The modern approach acknowledges increased economic interdependence and the role of structural factors in BOP imbalances. It places greater emphasis on capital flows, especially in a world of flexible exchange rates. Modern economists stress the importance of macroeconomic policies, international cooperation, and the use of advanced economic models to understand and address BOP issues, considering factors like income distribution and technological advancements.

1. Nafis Al Fateh(GC)
2019231011
The Elasticity approach to the Balance
of Payment

2. The main Headache
Inflow > Outflow
Imbalance in Balance of payment

3. The solution
Approaches
of BOP
Traditional
approaches
Modern
approaches
Elasticity approaches
Absorption approaches
Monetary approaches

4. Elasticity Approach
Marshall–Lernercondition->Devaluationofacurrencycanbe
successfuldependingontheelasticitiesofdemandofexport()
andofdemandofimport(
If >1Devaluationsuccessful
If =1Devaluationhasnoeffect
If >1DevaluationwillworsentheBOP

5. Absorption Approach
Thisapproachlooksattherelationshipbetweenacountry's
domesticabsorption(i.e.,domesticspendingonboth
domesticandforeigngoods)anditscurrentaccountbalance.
Itisvaluableforunderstandingtheimpactofdomestic
demandontradeimbalances.
IfY>ATradebalancewillimprove
IfY=ATradebalanceunaffected
IfY<ATradebalanceworsen

6. Monetary approach
ThemonetaryapproachtotheBalanceofPayments(BOP)focuses
onthelinkbetweenacountry'smoneysupply,exchangerates,and
tradeimbalances.
Itpositsthatchangesinthemoneysupplyinfluenceexchange
rates,which,inturn,impacttradebalances.Agrowingmoney
supplycanleadtoaweakercurrency,affectingexportsand
imports.
Moneysupply>MoneyDemand;makesdeficitbalanceof
payment

7. Monetary approach(contd.)
Inmonetaryapproach,controlovermoneysupplycorrectsthe
imbalanceofbalanceofpayment

8. Comparison
Among
Three
Approaches