Question

Give an example of how the balance of payments provides information concerning exchange rate determination.

Answer 1

Balance of payment will be providing information concerning exchange rate determination because balance of payment will be providing details about the supply and demand of the domestic currency in respect to the international currency and it will also mean that it will provide a large number of transactions in respect to the domestic currency in the international world and it will reflect the strength and weakness of the domestic currency in the international Arena when it is faced with other currencies.

Balance of payment will be providing with the important details related to the current account transaction and capital account transaction with the other countries and it will provide with the deficit and the surplus which are generated by the country's so it will provide enough information about the performance of a currency in respect to the other currency because ultimately the current account deficit and surplus is a complete reflection of performance of the currency, as if, the domestic currency will be weaker, current account will be in surplus.

If we have to give an example, then it can be said that the country which are having better balance of payment status are reflecting a demand for its currency in the international Arena and it will also mean that there has been a higher amount of trade with the respected country, so balance of trade is a reflection of the strength and the weakness of individual currency in respect to other currencies.