Foreign exchange rates and balance of .pdf

Discussion on Foreign exchange rates and balance of payment.

8. Balance of Payment
Calculation of Current Account Balance
•Current account = balance of trade + primary income + secondary
income
•Trade in goods:This part of the current account is a record of the
exports and imports of physical goods, hence it is also known as the
visible balance. It is the trade in raw materials, semi-manufactured
products and manufactured goods.
•Trade in services: This is a record of the export and import of services
(intangible products). Examples include the trade in services such as
banking, insurance, consultancy, shipping and tourism. It is
sometimes called the invisible balance.

9. Continued..
•Primary Income:
•Also known as investment income, this is a record of a country’s net
income earned from investments abroad. Examples are:
•» profits earned by subsidiary companies based in overseas countries
» interest received from loans and deposits in overseas banks
» dividends earned from fi nancial investments in overseas companies
» foreign direct investments of individuals or businesses in overseas
business ventures » money sent home by people working abroad.

10. Secondary income
•The final section of the current account records net income transfers,
per time period. It shows income transfers between residents and
non-residents.

11. Causes of current account deficit
•Lower demand for exports — this could be caused by a decline in
manufacturing competitiveness, perhaps due to higher labour costs in
the domestic economy. Another factor is declining incomes in foreign
markets, perhaps due to an economic recession.
•Higher demand for imports — domestic buyers will tend to buy more
imports if they are cheaper or of better quality. For example, a higher
exchange rate means the domestic currency can buy more foreign
currency, so this makes it cheaper to buy imports.

12. Consequences of current account deficit
•Consequences of current account deficits Like an individual, a country
cannot spend more (on imported goods, services and capital) than it
earns (from the export of goods, services and capital). The severity of
the consequences of a deficit depends on its size and duration.
•Reduced demand
•Unemployment
•Lower standards of living
•Increased borrowing

13. POLICIES OF ACHIEVE BOP
•Fiscal policy
•Monetary policy
•Supply side policy
•Protectionist measure

14. THANK YOU