THE BALANCE OF PAYMENTS AND EXCHANGE RATES DERRICK OFORI DONKOR DEPARTMENT OF ECONOMICS LECTURE: 6
Outline By the end of this chapter you should be able to understand The balance of payments as an accounting device recording the nation transactions with the rest of the world the balance of payment double entry system insuring that it always balances – which transactions are debit entries and which are credit the difference between the goods (merchandises) balance, the balance of trade, and the current account the link with chronic trade deficits and foreigners acquiring domestic assets the close link between the balance of payments and the international investment position of a country the exchange rate as the relative price of foreign currency the importance and applications of the real exchange rate and the real effective exchange rates
Why Trade? • Countries are open economies • The flows of money between residents of a country and the rest of the world are recorded in the country’s balance of payments account. • Receipts of money from abroad are regarded as credits and are entered in the accounts with a positive sign . • Outflows of money from the country are regarded as debits and are entered with a negative sign .
Three main parts of the balance of payments account: • The current account, • The capital account • The financial account. fixingtheeconomists.wordpress.com
The current account This records payments for imports and exports of goods and services, plus incomes flowing into and out of the country, plus net transfers of money into and out of the country. It is normally split into four subdivisions. The trade in goods account . This records imports and exports of physical goods (previously known as ‘visibles’). • Exports result in an inflow of money and are therefore a credit item.
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