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Unit9

The document discusses the balance of payments (BOP) and foreign exchange rates, outlining their definitions, components, and types such as fixed, flexible, and managed floating rates. It explains the concepts of currency appreciation and depreciation, as well as the sources of demand and supply for foreign exchange. Additionally, it covers the balance of trade, the distinction between autonomous and accommodating items, and the causes of BOP deficits.

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Rishabh Singh
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13 views

Unit9

The document discusses the balance of payments (BOP) and foreign exchange rates, outlining their definitions, components, and types such as fixed, flexible, and managed floating rates. It explains the concepts of currency appreciation and depreciation, as well as the sources of demand and supply for foreign exchange. Additionally, it covers the balance of trade, the distinction between autonomous and accommodating items, and the causes of BOP deficits.

Uploaded by

Rishabh Singh
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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XII ( ECONOMICS)

Unit 9 Topic – Balance of Payments

Balance of payments accounts- meaning and components; BOP deficit –meaning.


Foreign exchange rate-meanning of fixed and flexible rates and managed floating.
Determination of exchange rate in free market.
FOREIGN EXCHANGE RATE

1. Foreign Exchange Rate – The rate at which one currency is exchanged with other.
Example- 1 USD = 66 rupees 1 GBP = 82 rupees

2. Types of Foreign Exchange Rate: –

a) Fixed Exchange Rate –

i) The system in which exchange rate for a currency is fixed by the government.
ii) It is officially fixed in terms of gold or any other currency by the government.
iii) The exchange rate generally remains stable and only a small variation is possible.
b) Flexible Exchange Rate –

i) It is determined by forces of demand and supply of foreign exchange.


ii) There is no government intervention and it fluctuates freely according to market
conditions.
iii) The exchange rate keeps on changing.
c) Managed Floating –

i) It is a system in which foreign exchange rate is determined by market forces and


central bank influences the exchange rate through intervention in the foreign
exchange market. It is also known as Dirty Floating.
ii) It is hybrid of both fixed exchange rate and flexible exchange rate system.
iii) In this system central bank intervenes in the foreign exchange market to restrict
the fluctuations in the exchange rate within certain limit.
3. Devaluation – It is reduction in price of domestic currency in terms of foreign
currency because of government intervention. It takes place under fixed exchange
rate system.

4. Currency Appreciation and Currency Depreciation –

Currency Appreciation Currency Depreciation


It is increase in the value of It is decrease in the value of
Domestic currency in terms of Domestic currency in terms of
Foreign Currency. Example- 1 USD = Foreign Currency. Example- 1 USD =
66 Rupees 66 Rupees
1 USD = 65 Rupees 1 USD = 67 Rupees
It makes foreign goods cheaper in It makes domestic goods cheaper in
Domestic country as more of such Foreign country as more of such
goods can be purchased with same goods can be purchased with same
XII ( ECONOMICS)
amount of domestic currency. Thus amount of domestic currency. Thus
we prefer imports. we prefer exports.
5. Sources of Demand and Supply of Foreign Exchange: –

Sources of Demand of Foreign Sources of Supply of Foreign Exchange


Exchange
Import of goods and services Export of goods and services
Tourism abroad Tourism in domestic country
Unilateral transfer sent abroad Unilateral transfer sent to domestic
country
Purchase of assets in foreign country Purchase of assets in domestic country
Speculation in abroad Speculation in domestic country
e.g.- NASDAQ e.g.- SENSEX
Repayment of international loan Borrowing from international market
7. Determination of Exchange Rate – The equilibrium exchange rate is determined
at a level where demand for foreign exchange is equal to supply of foreign exchange.
Increase in demand leads to rise in exchange rate while increase in supply leads to
fall in exchange rate.

8. Changes in Exchange Rate –

Increase in Demand Increase in Supply

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BALANCE OF PAYMANTS

1. Balance of Payment – It is an accounting statement that provides a systematic


record of all the economic transactions, between residents of a country and the rest
of the world, in a given period of time.

2. Current Account of BOP and Capital Account of BOP –

Current Account of BOP Capital Account of BOP


It is an accounting statement that It is an accounting statement that
provides a systematic record of all provides a systematic record of all the
the economic transactions, relating economic transactions, between
to export and import of goods and residents of a country and the rest of
XII ( ECONOMICS)
services and unilateral transfers the world, which causes change in the
during a given period of time. assets or liabilities of the residents of
the country or its governments.
Components:- Components-
1. Export and Import of Goods 1. Borrowing and lending to and
i.e. visible items. from abroad. Borrowing from is
2. Export and Import of Services credit or positive side and lending
i.e. invisible items. to is debit or negative side.
3. Unilateral Transfers- one way 2. Investment to and from abroad.
transactions like gift. From is positive and to is
4. Income receipts and negative.
payments.to and from abroad. 3. Change in Foreign Exchange
Reserve .Deposit is negative and
withdraws is positive.

3. Balance of Trade – It is difference between the amounts of exports and imports


of visible items (goods). BOT = Export of Goods – Import of Goods

4. Autonomous and Accommodating Items –

Autonomous Items Accommodating Items


Those international economic Those international economic
transactions which takes place due to transactions that are undertaken to
some economic motive such as profit cover deficit or surplus in
maximization. autonomous transactions.
It is independent of the state of the They are undertaken to maintain the
BOP account. balance in BOP account.
It takes place in both current and It takes place only on capital account.
capital account.
These items are also known as above These items are also known as below
the line items. the line items.

5. Deficit in the Balance of Payment – It arises when total inflows on account of


autonomous transactions are less than total outflows on account of autonomous
transactions.

Causes -

a) Economic Factors – Developmental activities, High rate of Inflation, Change in


Demand, Cyclical fluctuation, Import of Services.

b) Political Factors – Political instability, Political disturbance.

c) Social Factors – Demonstration Effect, Change in taste and preferences.


XII ( ECONOMICS)

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