The document presents an overview of the balance of payments and exchange rates, detailing its components such as the current account, financial account, and capital account. It explains the current account's balance, its four main components, and how the financial account records ownership of international assets. Additionally, it describes various types of exchange rate systems including fixed, flexible, and managed floating rates.

1. ‫الرحيم‬ ‫الرحمن‬ ‫هللا‬ ‫بسم‬
َ‫ب‬َ‫و‬ ِ‫هلل‬َ‫ا‬ ُ‫ة‬َ‫م‬ْ‫ح‬َ‫ر‬َ‫و‬ ‫م‬ُ‫ك‬ْ‫ي‬َ‫ل‬َ‫ع‬ ُ‫م‬‫ال‬َ‫س‬‫ل‬َ‫ا‬
ُُُُ‫كت‬َ‫ر‬

2. Presented to: Mam Iqra
Presented by:
19011504-042
19011504-049
19011504-052
19011504-057
19011504-061
Course: ECO - 101
Semester: (B.S)3rd
Department: Islamic studies

3. “BALANCE OF PAYMENT
AND
EXCHANGE RATE”

4. Contents
• Balance of Payment
• Components of BOP
• Exchange rate
• Types of Exchange rate

5. Balance of payment
The balance of
payments is the record
of all international
trade and financial
transactions made by a
country's residents.

6. Components of BOP
The balance of
payments has
three
components.
The current
account,
The financial
account,
The capital
account.

7. Current account
• The current account is a country's trade
balance plus net income and direct
payments. The trade balance is a country's
imports and exports of goods and
services. The current account also
measures international transfers of capital.

8. Current account
• A current account is in balance when the
country's residents have enough to fund all
purchases in the country. Residents
include the people, businesses, and
government. Funds include income and
savings. Purchases include all consumer
spending as well as business growth and
government infrastructure spending.

9. The Four Current Account Components
The Bureau of Economic Analysis
divides the current account into four
components
• trade,
• net income,
• direct transfers of capital, and
• asset income.

10. Financial Account
• The financial account is a measurement of
increases or decreases in international
ownership of assets. The owners can be
individuals, businesses, the government,
or its central bank. The assets include
direct investments, securities like stocks
and bonds, and commodities such as gold
and hard currency.

11. Subaccounts of the
Financial Account
Foreign ownership of
domestic assets
Domestic ownership of
foreign assets

12. Foreign ownership of domestic assets
• The foreign ownership subaccount is
broken into two parts: private assets and
foreign official assets. When residents of a
foreign country own assets in the domestic
country, the financial account records a
decrease.

13. Domestic ownership of foreign assets
• The domestic ownership subaccount
specifies three types of ownership. Private
owners are individuals or businesses and
can have assets that include foreign loans,
deposits at banks in other countries, or
direct investments made into other
countries. Government owners are either
at the local, state, or federal level, though
the federal government is the primary type
of government asset owner.

14. Capital Account
• The capital account is used to account for
and measure any financial transaction
within a country that isn’t exerting an
active effect on that country’s savings,
production, or income. The capital account
along with the current and financial
accounts make up the country’s balance of
payments, which comprehensively records
and accounts for every financial
transaction that affects a country.

15. Capital Account Subaccounts
There are two primary
subaccounts within the
capital account:
Capital Transfer
Acquisition/Disposal
of Non-Produced,
Non-Financial
Assets

16. Exchange rate
An exchange rate is the
value by which two
currencies are traded for
one another. In other words,
it is the rate or value at
which one currency can
purchase another currency.

17. Types of exchange rate
Some of the major types of foreign
exchange rates are as follows:
Fixed Exchange Rate System
Flexible Exchange Rate System
Managed Floating Rate System.

18. Fixed Exchange Rate
• The rates that are directly convertible
towards other currencies are called fixed
rate. Also, in case of a different currency,
there is a currency board arrangement
where it is backed by the domestic
currency against one to one foreign
reserves.

19. Managed Floating Rate System
• Traditionally, International monetary
economists focused their attention on the
framework of either Fixed or a Flexible
exchange rate system. With the end of
Bretton Woods’s system, many countries
have adopted the method of Managed
Floating Exchange Rates.

20. Flexible Exchange Rate System
• Flexible exchange rate system refers to a
system in which exchange rate is
determined by forces of demand and
supply of different currencies in the foreign
exchange market.

21. References
• https://www.thebalance.com/current-
account-definition-and-4-components-
3306265
• https://corporatefinanceinstitute.com/resou
rces/knowledge/economics/financial-
account/
• https://www.yourarticlelibrary.com/macro-
economics/balance-of-payment/main-
types-of-foreign-exchange-rates/30435