Question

Expound on the balance of payments/current account view of exchange rates.

Answer 1

Current account will be including the short-term transactions which were undertaken by an economy with the relation to the other economy in the foreign exchange and it can be seen that there would be a large amount of import and a small amount of export it will mean that it the foreign currencies into the countries will be decreasing and it will mean that current account will be weakening and it will lead to a deficit in the current account

Current account will also be reflecting that when there would be a higher amount of export and lower amount of import it would also mean that the current account would be in surplus and it would be having a positive impact on the overall balance of the payment

So, it can be said that the effect of the current account view on the exchange rate would be impacted as when the current account would be having a surplus it would mean that the exchange rate will be gaining strength whereas when the current account will be running in a deficit that would mean that it will have a negative implication on the exchange rate of domestic currency.