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Unit 1- Chapter 7

Unit 1- Chapter 7. Balance of Payments and Exchange rate. Page: 121-127. Balance of Payment also known as ‘Current Account’.

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Unit 1- Chapter 7

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  1. Unit 1- Chapter 7 Balance of Payments and Exchange rate Page: 121-127

  2. Balance of Payment also known as ‘Current Account’ ‘This account records the value of trade in goods and services between one country and the rest of the world. A deficit means that the value of goods and services imported exceeds the value of goods and services exported.’ What does this mean? ‘Goods and Services purchased from other countries’ ‘Goods and Services sold to consumers and business in other countries’ Give examples?

  3. So if a country is importing more then what it is exporting A Depreciation in the value of the currency's exchange rate A decline in the country’s reserves of foreign currency An unwillingness of foreign investors to put money into the economy

  4. Exchange rate ‘the price of one currency in terms of another’ Exchange rate depreciation ‘a fall in the external value of a currency as measured by its change rate against other currencies’ If $1 falls in value from SR4 to SR2, this would mean that the value of the dollar has depreciated. Exchange rate appreciation ‘ a rise in the external value of currency as measured by its changed rate against other currencies’ If $1 rises from SR2 to SR4 we would say that the value of the dollar has appreciated

  5. Exchange rate fluctuations : When the demand for a currency exceeds supply, its value will rise …. Yes? This is called an appreciation because one unit of the currency will buy more units of other currencies. Examples? So, when a currency depreciates the value of the currency in terms of other currencies will fall down. The effect would be the opposite of which we discussed earlier

  6. So who really benefits and who does this all effect???? If we talk about domestic based business who would gain from a depreciation in the currency: • Home based exporters, who can now reduce their prices in overseas markets • This should increase the VALUE of their exports and lead to an expansion of the business • Business that sell in the domestic market will experience less price competition from importers • Prices of imported goods and services are likely to rise on the domestic market. So if some business in the domestic market would gain who would lose out? • Manufacturers who depend heavily on imported supplies of materials, components or energy sources. • These costs will rise and will reduce competitiveness. • Retails that purchase foreign supplies, especially if there are close domestic substitutes. • The prices of these imports will rise and the retailers may be forced to find domestic suppliers of similar quality goods

  7. What about non-price factor? Does it play a role in the success of a business? Macro – economic policies – What are they? These are those policy that operate by influencing the level of total demand in the economy. This level of DEMAND then works though to determine the VALUE of output of goods and services and as a CONSEQUENCE the level of employment in a country. Please Read Page 121-124

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