Question

(a) What are the components of Balance of Payment? Why is the analysis of Balance of

Payment important for a country?

(b) How is the exchange rate of a currency determined?​

Answer 1

Answer:

a) Elements of balance of payment

There are three components of balance of payment viz current account, capital account, and financial account. The total of the current account must balance with the total of capital and financial accounts in ideal situations.

b) Fixed Exchange Rates. Currency prices can be determined in two main ways: a floating rate or a fixed rate. A floating rate is determined by the open market through supply and demand on global currency markets. Therefore, if the demand for the currency is high, the value will increase.