Balance of payments: A country's balance of payments deficit will cause foreign currency exchange rates to rise and domestic currency exchange rates to fall. Please explain.

The exchange rate is determined by currency supply and demand. If there is a deficit in the international balance of payments, that is, exports are less than imports, exports demand domestic currency, and imports demand foreign currencies. Imports are greater than exports, causing an increase in the demand for foreign currencies. Relatively speaking, The demand for the domestic currency decreases, causing the domestic currency to depreciate, that is, the exchange rate of the domestic currency decreases. Correspondingly, foreign currency exchange rates rise.

The international balance of payments refers to all monetary receipts and payments of a country caused by foreign economic transactions and settlement of external claims and debts within a certain period of time. It has two levels of meaning, narrow and broad. The balance of payments in a narrow sense refers to the foreign exchange receipts and expenditures that must be settled immediately due to economic, cultural and other foreign economic exchanges of a country or region within a certain period of time.

The broad balance of payments refers to the sum of the monetary value of all economic activities between residents and non-residents in a country or region. It is the epitome of a country's foreign political and economic relations, and is also a reflection of a country's position in the world economy and its rise and fall.

The balance of payments situation is usually reflected through the balance of payments statement, which is a statistical table that systematically records the country's international balance of payments items and finance in a certain period of time. This statistical table is a comprehensive report of each country. Mastering the basic information on the country's foreign economic exchanges is the main basis for the country's government to formulate foreign economic policies. It is also the economic environment that international marketers must consider when making marketing decisions.

What are the account structures?

Current account:

The current account summarizes the purchases of goods and services produced in the current period between a country and its foreign trading partners. and transactions resulting from sales. If the United States has a current account surplus (a positive number), it means that U.S. residents sell more goods and services to foreigners than they buy imported goods from foreigners. Thus, U.S. residents have funds available to lend to foreigners.

Usually, the U.S. current account has a negative balance, or a deficit. The U.S. current account deficit in 2009 was $378.4 billion. When there is a current account deficit, the United States must borrow the difference to pay for goods and services purchased from abroad. In summary, a current account surplus or deficit must be balanced by changes in international borrowing or official reserve transactions.

Policymakers have been concerned that the United States' huge current account deficits in the 1980s, 1990s, and 2000s have led to the United States' heavy reliance on savings from abroad to finance domestic consumption, investment, and federal budget deficits. Particularly worrisome is the growing reliance since the mid-2000s on funding from foreign central banks rather than private investors.

A major reason for the U.S. current account deficit in the 2000s may have been the global "savings glut." The savings glut is partly the result of high savings rates in countries such as Singapore, which have aging populations that boost their savings for retirement.

In addition, global savings levels have increased because, starting in the late 1990s, developing countries such as China, South Korea, and other Asian countries, as well as some Eastern European countries, have also increased their savings as their income levels began to rise. Savings. Due to high savings rates and relatively limited investment opportunities, money flows into the United States from these countries, boosting the value of the dollar. A high dollar value reduces U.S. exports and increases imports, leading to a current account deficit.

Financial Accounts:

Financial accounts measure the existing transactions of financial or real assets between countries. When someone in a country sells an asset (for example, a skyscraper, a bond, or a share of a stock) to a foreign investor, the transaction is recorded in the balance of payments account as a capital inflow because funds flow into the country to purchase it. assets.

When someone in a country purchases an asset from abroad, the transaction is recorded in the balance of payments accounts as a capital outflow because funds flow out of the country to purchase the asset. For example, when a wealthy Chinese entrepreneur purchased a duplex in New York's Trump Tower, the transaction was recorded as a capital outflow from China and an inflow from the United States.

The financial account balance equals capital inflows minus capital outflows, plus the net value of transactions in the capital account, which is primarily comprised of debt relief and the transfer of financial assets when immigrants enter the United States. constitute. [1] A financial account is in surplus if U.S. residents sell more assets to foreigners than they buy to foreigners.

If U.S. residents buy more assets from foreigners than they sell to foreigners, the financial account is in deficit. Capital inflows to the United States in 2009 were $356.5 billion and capital outflows were $140.5 billion. Adding in net capital account transactions of $100 million, the net financial account balance (the increase in U.S. assets held by foreigners) was $215.9 billion.

Official settlement accounts:

Not all capital flows between countries represent transactions by households and businesses. Private capital flows were supplemented by changes in government and central bank asset holdings.

Official reserve assets are assets held by the central bank for international payments to settle the balance of payments and implement international monetary policy.

Historically, gold has been the main official reserve asset. Official reserves today consist primarily of government securities of the United States and other industrialized countries, deposits in foreign banks, and a currency called the Special Drawing Rights created by the International Monetary Fund (an international institution we discuss later in this chapter). Rights, SDRs) special assets. Official settlement equals the net increase in a country's official reserve assets (domestic holdings minus foreign holdings).