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Balance of Payment –(BoP)
Balance of payment is a summary statement of transactions between domestic and foreign residents
for a specific country over a specified period of time
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There are two types of BoP accounts and the structure is as follows:

Figure 1: BoP Structure

Current Account

The current account summarizes the flow of funds between one specified country and all
other countries due to purchases of goods or services, or the provision of income on financial
assets
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Figure 2 : Structure of the Current Account

Impact of Currency Appreciation and Depreciation On Current Account
Let's assume one US dollar equals 600 Chilean pesos, and a pound of local apples costs
one dollar
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If the dollar
appreciates and buys 700 pesos, imported apples will now cost 0
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In Chile, American apples will cost 700 pesos instead of 600
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Local consumers might find better prices on imported goods, so imports tend to
increase
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Therefore, exports tend to decrease
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But in a realistic situation currency fluctuation will be determined by money supply
and demand of the country
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Hence no direct
relationship can be seen between trade flows and capital flows
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Both these two will be determined by some
other economic factors such as savings and investment decisions
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The key components of the capital account are direct foreign investment, portfolio investment, and
other capital investment
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b) Impact of National Income
– A relative increase in a country’s income level will decrease its current
account, as imports increase
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– Some trade restrictions may be imposed on certain products for health
and safety reasons
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-One reason for this is that when currency appreciates local products and
services will be perceived as expensive compared to international imported
products
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-The other reason is that when currency appreciates, exports will be perceived
to be expensive for the international buyers hence they will be discouraged to
invest in appreciated currency production and consumption
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Prearranged international transactions
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The lag time between a weaker home currency and increased foreign
demand has been estimated to be 18 months or longer
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A devalued currency means
imports are more expensive, and on the assumption that the volume of imports and exports
change little immediately, this causes a depreciation of the current account (a bigger deficit or
smaller surplus)
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Eventually, if this happens, the trade balance may improve on what it
was before the devaluation
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