Question

Expound on the Current Account theory of Exchange Rate determination.

Answer 1

Current account theory of exchange rate determination would be focused at the determination of the exchange rate based upon the trading positions for country which will be recorded into the current account and it could be meaning that when there will be a surplus in the current account it would be leading to a higher amount of imports and exports and it should be leading to effect upon the overall currency exchange rate as the demand for the domestic currency will be lower in the foreign markets and it would be leading to an Appreciation in domestic currency

An increase in the current account deficit would be leading to a depreciation in the overall domestic currency because it would be leading to an increase of supply of the domestic currency into the foreign markets because it will be cheaper and it would be leading to a more amount of foreign reserve for the country so many countries are always trying to have a current account deficit as it should be helping in having a high amount of foreign currency on its ends.