Question

What is the Balance of Payment (BOP)? How does BOP and the balance of trade affect the exchange rate. Discuss the impact of BOP

Answer 1

What is the Balance of Payment (BOP)

balance of payment of a country is the record of all economic transactions between the residents of the country and the rest of the world in a particular period of time,The balance of payments tracks international transactions. When funds go into a country, a credit is added to the balance of payments When funds leave a country, a deduction is made. For example, when a country exports 50 cars to another country, a credit is made in the balance of payments and vice versa.

How does BOP and the balance of trade affect the exchange rate

A change in a country's balance of payments can cause fluctuations in the exchange rate. The reverse is also true when a fluctuation in relative currency strength can alter balance of payments,The trade balance worsens by the value of total imports in foreign currency multiplied by the rise in the price of foreign currency since contracts made . The short-run period is commonly known as the “exchange rate pass-through period.”

impact of BOP

Balance of payment is an important indicator of the health of any country's business as it reflects its international trade and investment performance. Balance of Payment, funds are recorded as positive and uses of funds are recorded as negative.A BoP surplus indicates that a country's exports are more than its imports. A BoP deficit, on the other hand, indicates that a country's imports are more than exports. Both scenarios have short-term and long-term effects on the country's economy,A country's BOP is vital for the following reasons:

1. BOP of a country reveals its financial and economic status. -BOP statement can be used as an indicator to determine whether the country's currency value is appreciating or depreciating.
2. BOP statement helps the Government to decide on fiscal and trade policies- It provides important information to analyze and understand the economic dealings of a country with other countries