Question

Balance of Payment Crisis, Foreign Exchange Rate and Inflation

1. Explain why developing countries (that do not issue international currencies) could face balance of payments crisis (“external constraint”)

Answer 1

Balance of payments is a statement showing all transactions between a nation and the rest of the world for a given period.
Balance of payment is divided into two accounts capital account and current account. Where current account flows consist primarily of goods and services, capital account flows are flows in the ownership of foreign and domestic assets.
The reason for the crisis of bop in the developing countries is that they keep themselves indulged in getting themselves industrialized. Another reason for the crisis in the balance of payment is the change in the value of the country's currency. A decrease in the demand for the country's currency is the reason for the decline in the value of a country's currency. The government often takes countermeasures to stabilize the market and balance the value of the currency and maintain the exchange rate. Another traditional cause for the crisis in the balance of payment in developing countries is the severe increase in the trade deficit of the country. It severely affects the value of the currency, and there is a sharp drop in the demand for domestic currency relative to foreign currency.