Answer to Question #124621 in Macroeconomics for Shafaq

Question

Define Balance of Payment (BoP). State the major components of BoP.
What is effect on BoP of two countries, if inflation rate in country A is higher than country B?
Differentiate between devaluation of a currency and depreciation of a currency.

Answer 1

1.Balance of Payments is a declaration of transactions made between organizations in a given country and as well as the rest of the world over a designated period of time usually a year, half-yearly or as well as quarterly.

2.State the major components of Balance of Payments

1. The Current Account
2. The Capital Account
3. The Balancing Account

3.Inflation is similar to interest rates, which also has an influence on the exchange rates of a given country. Higher interest rates is inclined to attract more foreign investments, consequently resulting to the rise in demand of a given country's currency. Unlike low interest rates which discourage foreign investments thus resulting in the decrease in demand of a country's currency. Therefore, it it is evident that country A will experience high rate of foreign investment resulting to the increase in demand of the currency of that country. On the other hand, country B with low interest rate will experience low foreign investments thus decrease in demand of the country's currency.

4.Devaluation is a conscious decision made by a country by lowering its exchange rate either in a fixed or non-fixed exchange rate whereas depreciation is a situation where there is decrease in the value of a country's currency in a floating exchange rate.