: Explain how a country’s balances of payment directly affect the exchange rate.

Expert Solution

the balance of payment of a country directly affects the exchange rate and consider the balance of payment is negative where one of the main reasons for balance of payment is excess of imports. In this regard devaluation of currency or increase in the exchange rate with respect to other currency is done because the disequlibrium in the balance of payment where more deficit is in place, what happens is that the imports become more costly here because you have to spend more amount of home currency to get one unit of foreign currency as a result of which you import less and the exports can increase due to the exports becoming cheaper for the foreign countries does a result of which the exports increase and ultimately the balance of payment can be corrected and in this way balance of payment is directly related to exchange rate where high deficit cause devaluation and low deficit or surplus can cause appreciation of the currency

Rahul Sunny answered 1 year ago

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