International Finance

FIN 405: International Finance YU SUMMER 2010   Monday 28 June 2010
Chapter 3 Supplement: Balance of Payment (BOP) Impact on the Country Currency Value
  1) BOP Definition
BOP is a statistical record of a country’s transactions with the rest of the world. Transactions can be financial, merchandise or services.
  2) The Impact of the BOP on the country’s currency appreciation or depreciation
BOP provides detailed information concerning the demand and supply of a country’s currency.
Example: if US imports more than it exports, this means the supply of dollars is likely to exceed the demand in the foreign exchange market. This means that the US dollar would be under a pressure to depreciate against other currencies. On the other hand, if Exports are higher than imports, the US dollar would appreciate (foreign demand for the US dollar would increase in order to for foreigners to buy more US goods).
When a country’s currency depreciates against other currencies, the country’s exports tend to rise and imports fall, improving the   trade balance. This is called J-Curve effect.
Trade Balance change


While the currency is in decline (depreciation) the trade balance will start deteriorating but later on, it will rise from deficit to surplus ( as exports increase and imports decrease)

BOP deficit will lead to a country’s restriction of foreign imports and discourage capital outflow.
BOP surplus, will favour less restrictions on foreign imports.
A constant BOP deficit can be translated as a negative sign on a country international competitiveness or poor domestic economic indicators (poor quality products, etc...
  3) BOP Accounting
Any transaction that results in a receipt from foreigners will recorded a credit with a + sign. Any transaction that gives rise to a payment to foreigners will be recorded as a debit with minus...