Question

Discuss how international balance of payments impacts currency exchange rate.

As you introduce this topic with your initial posting, please also select a partner country to the U.S. and include a paragraph about the status of the balance of payments and what it means.

Answer 1

International balance of payments impacts currency exchange rate. When a country’s balance of payments change then usually fluctuations in the exchange rate is witnessed between the currency of that country and foreign currencies.

Balance of payments is nothing but an interplay between exports and imports of a country. When a country’s import increases the demand for foreign currency increases and so the foreign currency appreciates relative to the domestic currency of the country that is importing. On the other hand in case of exports the domestic currency witnesses a strengthening.

A partner country to the U.S. that I have selected is China. U.S. has a high trade deficit with China. In fact the deficit was $375 billion in 2017. The reason for this deficit was that the interplay of exports and imports of USA from China is weighted towards imports from China. USA imports more from China (in terms of value) than it exports to it and this has led to a deficit. What it means for USA is that it has a negative current account but it is not moving towards a balance of payment crisis.