Approaches of the Balance of Payment Table of Contents Introduction 3 Balance of Payment 3 The Elasticities approach 4 Relevance 4 Works Cited 5 5 Introduction
The value of the currency of a country is purely dependent upon the overall economic condition of that country. There are a number of factors that contributes to the national economy of a country. The factors mainly include employment, foreign investment, manufacturing, and trade balance among many other indicating factors. All the transactions that a country carries out with other nations reflect a part of balance of payment. In this context economists deploy a number of methods and tool in order to evaluate and come up with the techniques of increasing, balancing and decreasing the trade among the countries.
Balance of payment is an important section of the national economy of a country. It constitutes a major part. The report will primarily highlight the importance and relevance of balance of payment. Further it will emphasize on one of its approaches and will depict the importance of that approach in the present business environment. However in this respect, the elasticities approach will be highlighted. Similarly its relevance in the present business environment will be discussed. Nevertheless before getting into the discussion a brief overview of balance of payment is presented below:-
Balance of Payment
The Balance of payment (BOP) can be referred to as one of the economic indicators which are mainly used to determine the political and economical stability of a country (Nayak 172). It takes into account the trade balance, financial transactions with the other countries for a specific period of time. Apart from this balance of payment distinguishes all the exports and imports, which embraces all the financial transactions, and it also differentiates monetary differences of the economic transactions. Now in the context of a country, if it has a positive BOP, then it signifies that a country has more funds coming in from the international trade than going out. While negative BOP illustrates that, a country has more funds flowing out than coming in.
The Elasticities approach
Elasticities approach is an approach of BOP that tries to predict the outcome after the impact of policy changes on BOP. In order to cite an example, elasticities approach primarily shed light on the impact of exchange rate on the balance. Furthermore, if the balance of payment is in equilibrium state, the elasticities approach assumes that the devaluation can certainly enhance BO (Gagnon, Long-run supply effects and the elasticities approach to trade). However devaluation to perform successfully, price elasticities of foreign demand of import and domestic demand has to increase. Hence whenever a country devaluates its currency, it improves the condition of BOP under ideal conditions.
In the present business world the elasticities of approach of BOP has high importance. This approach is being widely used. With the deployment of elasticities approach countries are able to gauge the impact of balance of payment on the national economy. Also it helps to control the value of currency by the devaluation. Hence from an overall viewpoint, in the present business environment, the elasticities approach plays an indispensible role in the national economy of a country.
Gagnon, Joseph E. Long-run supply effects and the elasticities approach to trade. Ideas. n.p., n.d. Web. 30 Aug. 2012.
Nayak, Satyendra S. Globalization and the Indian Economy: Roadmap to Convertible Rupee. Routledge: London, 2008. Print.