(a) Balance of payment always balances. Explain.
(b) When the supply of foreign currency rises, the price of foreign currency falls. Justify the statement.
(a) Balance of payment always balances. Explain.
(b) When the supply of foreign currency rises, the price of foreign currency falls. Justify the statement.
(a) Balance of payments has two main parts:
(i) Autonomous items which include both current and capital account transactions which take place with the objective of profit making. These items may lead to disequilibrium in the balance of payment i.e., deficit and surplus in the balance of payment.
(ii) Accommodating items: These are the transaction which are undertaken to balance out the balance of payment. It means the deficit or surplus in the balance of payment due to autonomous items will be covered by the inflow or outflow from the official reserves.
(b) The major component of the supply of foreign currency is the exports of a country’s goods and service. Higher the exchange rate, higher will be the export because domestic goods will become cheaper for the foreigners. Hence, the supply of foreign exchange rises. Also, when the foreign exchange rate rises, more foreigners will be attracted to the domestic country. This will further increase the supply.
(a) Balance of payments has two main parts:
(i) Autonomous items which include both current and capital account transactions which take place with the objective of profit making. These items may lead to disequilibrium in the balance of payment i.e., deficit and surplus in the balance of payment.
(ii) Accommodating items: These are the transaction which are undertaken to balance out the balance of payment. It means the deficit or surplus in the balance of payment due to autonomous items will be covered by the inflow or outflow from the official reserves.
(b) The major component of the supply of foreign currency is the exports of a country’s goods and service. Higher the exchange rate, higher will be the export because domestic goods will become cheaper for the foreigners. Hence, the supply of foreign exchange rises. Also, when the foreign exchange rate rises, more foreigners will be attracted to the domestic country. This will further increase the supply.
