Question

The Traditional economic measure, Balance of Payment, is responsible for its
effects on Exchange Rate, Gross Domestic Product, Unemployment and Inflation. Discuss
how?

Answer 1

Balance of payment is an important measure in order to determine the economic stability of a country and it is used to determine how a country is dealing with its foreign exchange fluctuation in order to maintain current account deficit or current account surplus through exports and imports.

When there will be an appropriate balance of payment, it would mean that country is able to maintain current account surplus through adequate management of export and import and that will be having an implication on the overall currency rate because when there would be appropriate balance of payment. it would lead to an appreciation in the domestic currency.

Balance of payment will also be having an implication on the gross domestic Product because when there would be an appropriate balance of payment, it would mean that the gross domestic product will be increasing through appropriate management of the exports and imports and when they would be an appropriate Gross domestic Product on the upside, it will mean that there would be creation of demand and there will be creation of jobs in the economy and there would be also increase in the Gross domestic Product through increase in demand and there would be lower unemployment because there would be a higher gross domestic Product and it will mean that inflation would be on the higher side because that would be a higher amount of demand into the economy and this demand will be driving the prices higher and that higher prices would be leading to a higher amount of Inflation so it can be said that balance of payment is responsible for its effect on the exchange rate along with gross Domestic Product and unemployment along with inflation..