What are the theory of balance of payment?
The balance of payments theory of exchange rate holds that the price of foreign money in terms of domestic money is determined by the free forces of demand and supply in the foreign exchange market. It follows that the external value of a country’s currency will depend upon the demand for and supply of the currency.
Who gave the theory of balance of payment?
1820–1914: Classical economics It is the foundation of what is known in modern economic studies as the quantity theory of money, the neutrality of money and the consideration of interest rates not as a monetary phenomenon, but a real one. Adam Smith built on this foundation.
What is elasticities approach?
The elasticity approach tries to predict the outcome policy changes will have on the balance of payments. For example, this approach illustrates how exchange rates will affect the balance. Further, the elasticity approach assumes that if the BOP is in equilibrium, devaluation can improve the balance of payments.
What are the objectives of balance of payment?
– reduce private-sector demand for consumer goods and services; – increase government current revenue; – reduce government current expenditure; – reduce government capital expenditure; – increase the external debt of the country; and – deplete the gold and other foreign reserves of the country.
What is J-curve and S Curve?
The S curve, or logistic growth curve, starts off like a J curve, with exponential growth rates. Over time, the environment becomes saturated (e.g., market saturation, competition, overcrowding), the growth slows, and the forecast value eventually ends up at a saturation or maximum level.
What is the Marshall Lerner condition J-curve?
The J-Curve is related to the Marshall-Lerner condition, which states: If (PED x + PED m > 1) then a devaluation will improve the current account.
Is the balance of payments theory of exchange rate a truism?
In fact, the balance of payments theory of exchange rate is merely a truism (axiom or saying) – a self-evident fact without any causal explanatory significance.
What is an imbalance in the balance of payments?
This new approach showed that an imbalance in BOP involved an adjustment in income, employment and output irrespective of what changes took place in prices and of how the deficit was financed.
What is the nature of a balance of payments deficit?
This restatement of the nature of a balance of payments deficit is the starting point for what Johnson calls the “payments approach” directing attention to two key aspects of any deficit: its monetary significance and its relation with the level of activity of the economy. Let us first look at the implications of the excess of P over R.
What is the absorption approach to the foreign balance of payments?
The whole approach lo the foreign balance problem becomes policy oriented around measures operating on the constituents of domestic absorption of national income. A useful development of the absorption approach and a synthesis of the work done on its basis for balance of payments policy have been made by Harry Johnson.
