balance of payment and its components, types. difference between bop &bot. foreign exchange rate and system. determination of exchange rate. exchange market.

1. Balance of payment &
exchange rate
SUBMITTED TO:- SUBMITTED BY:-
MR. AJAY SAMYAL. MEENAL GUPTA
827

2. Balance of payment
 A systematic record of all economic transactions between its
residents and residents of foreign countries.
 It’s a statement of accounts of these receipts and payments.
 It includes visible, invisible items and capital transfers.

3. Components of BOP
1. Current account
 Export and import of goods.
 Export and import of services.
 Unilateral transfers from one country to the other.
2. Capital account
 Foreign investment
 Loans and borrowing.
 Changes in reserve of gold and foreign exchange with the central
bank of the country.

4. Types of BoP
 Balanced BoP:- Total receipts = Total payments
 Favorable BoP:- Total receipts > Total payments
 Unfavorable BoP:- Total receipt < Total payments

5. BoP
 It includes visible,
invisible item and capital
transfers.
 It is a wider concept and
it includes BoT.
 Unfavorable BoP can’t
met out of favorable
BoT
• It includes only visible
item.
• It is narrow concept as it
is a part of BoP.
• Unfavorable BoT can be
met out by favorable
BoP.

6. Foreign Exchange Rate
 The rate of exchange measures number of units of one
currency which is exchanged in the foreign market for one
unit of another.
 It expresses the ratio of exchange between the currencies of
two countries.
 Example:-
$1 = Rs 50 Or Rs1 = 150$ = 2 cents

7. System of exchange rate
 Fixed exchange rate system:- rate of exchange is fixed by the government.
1. Gold standard system:- value of one currency in terms of other currency was
fixed considering gold value of each country.
2. Bretton Woods system:- different currently were pegged to one currency, that
is US dollar and US dollar was assigned gold value at a fixed price. Value of one
currency in terms of US dollar ultimately implied value of that currency in terms
of gold.
 Flexible Exchange rate system:- Rate is determined by the demand for and
supply of different currencies in the foreign exchange market.

8. Determination of exchange rate
It is determined by forces of supply and demand in the foreign exchange
market.
 Demand for foreign exchange
1. Payments of international loans.
2. Gifts and grants to rest of the world.
3. Investment in rest of the world.
4. Direct purchase and imports from rest of the world.
 Supply of foreign exchange
1. Exports of the country.
2. Direct foreign investment.
3. Direct purchases of goods and services.

9. Equilibrium rate of exchange

10. Foreign exchange market
It is the market for national currencies of different
countries in the world.
Functions of foreign exchange market:-
 Tanfer function
 Credit function
 Hedging function

11. Operations of foreign exchange
market
 Spot market:- Market which handles only spot
transactions or current transactions. It is of “daily nature
please”.
 Forward market:- Market which handles such transactions
of foreign exchange as are meant for future delivery. It only
caters to forward transactions.

12. Thank you