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| Effects of Exchange Rate of Balance Payments |
| Effects of Adjustment Mechanisms | Exchange Rates Factors |
As a result of
totalling all payment inflows and payment outflows the Balance of Payments can be calculated.
This figure - if taken formally - represents the final surplus or debt
resulting from all transactions with the rest of
the world (on current [trade] and capital [investments] account) in any given
year.
It is usual,
however, to use the "current account balance" as the figure which is
most widely quoted and compared representing, as it does, the import and export
of goods and services.
The target for trade
balances is to achieve "equilibrium" or surpluses sufficient to pay
off debts.
A country whose
balance of payments shows consistent deficits is said to be in
"disequilibrium".
If a country has a surplus in its balance of payments, it is said to be a creditor nation. It can add this surplus to its reserves or lend it to other nations to enable them to improve their economies.
If a country incurs
a deficit in its balance of payments, it is said to be a debtor nation as it has spent more than it has earned. It must
therefore finance this deficit either by drawing upon its reserves or borrowing
from overseas.
When a country's
balance of payments is in deficit it means that it has imported more than it
has exported and an increased amount of its currency is in the hands of overseas
banks and corporations.
This effectively
causes the value of its currency to fall, i.e. the exchange rate to weaken.
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