**Traditional Approach to Balance of Payments (BOP):** The traditional approach views the BOP as an accounting statement and emphasizes maintaining a balance between the current account and the capital and financial account. It focuses on the current account balance, often under a fixed exchange rate system, and employs policy responses like exchange rate adjustments and import controls to address BOP imbalances. **Modern Approach to Balance of Payments (BOP):** The modern approach acknowledges increased economic interdependence and the role of structural factors in BOP imbalances. It places greater emphasis on capital flows, especially in a world of flexible exchange rates. Modern economists stress the importance of macroeconomic policies, international cooperation, and the use of advanced economic models to understand and address BOP issues, considering factors like income distribution and technological advancements.

1. Nafis Al Fateh(GC)
2019231011
The Elasticity approach to the Balance
of Payment

2. The main Headache
Inflow > Outflow
Imbalance in Balance of payment

3. The solution
Approaches
of BOP
Traditional
approaches
Modern
approaches
Elasticity approaches
Absorption approaches
Monetary approaches

4. Elasticity Approach
Marshall – Lerner condition -> Devaluation of a currency can be
successful depending on the elasticities of demand of export ( )
and of demand of import (
If > 1 Devaluation successful
If = 1 Devaluation has no effect
If > 1 Devaluation will worsen the BOP

5. Absorption Approach
 This approach looks at the relationship between a country's
domestic absorption (i.e., domestic spending on both
domestic and foreign goods) and its current account balance.
It is valuable for understanding the impact of domestic
demand on trade imbalances.
If Y > A Trade balance will improve
If Y = A Trade balance unaffected
If Y < A Trade balance worsen

6. Monetary approach
 The monetary approach to the Balance of Payments (BOP) focuses
on the link between a country's money supply, exchange rates, and
trade imbalances.
 It posits that changes in the money supply influence exchange
rates, which, in turn, impact trade balances. A growing money
supply can lead to a weaker currency, affecting exports and
imports.
 Money supply > Money Demand ; makes deficit balance of
payment

7. Monetary approach(contd.)
 In monetary approach, control over money supply corrects the
imbalance of balance of payment

8. Comparison
Among
Three
Approaches