why BOP = 0 always? (1 Viewer)

[AGB]

i actually never used the bulmer textbook....i was told that it was pretty crap so, although i owned a copy, i never opened it...

it's pretty standard info and can prob be found in most textbooks

 

[Turner]

Originally posted by AGB
here is the definitive answer to why the BOP = 0 under a floating exchange rate system


Supply of $A
Payments for imports (M)
Income/transfer debits (Y debits)
Capital and financial outflow (K outflow)

Demand for $A
Receipts for exports (X)
Income/transfer credits (Y credits)
Capital and financial inflow (K inflow)

Supply of $A = Demand for $A
M + Y debits + K outflow = X + Y debits + K inflow
M X + Y debits Y credits = K inflow K outflow (rearranged equation)
Balance on Current account = Balance on Capital and Financial account

That makes sense, but what happens under a fixed exchange rate system? Does it equal zero?

 

[AGB]

no...prior to the floating of the dollar, the balance of payments never balanced!

 

[aditya]

you didnt exactly poiny out the singificance of the floating excahnge rate system... and this is all confusing... im in the same situation as Lainee... at first i agreed with Aj1010201201.. (wateva) but now i dno wat to think...

In my opinion, layman terms. I thought they were always equal because a deficit in the balance of goods and services to due excessive importing needed to be financed through the capital and financial acount through an inflow of funds??? hence balancing them to O... and there was something else about accoutning... is it an accrual system or the other crap one? has to be accrual yeh? *shrugs*

also when u talk about :

Supply of $A = Demand for $A
M + Y debits + K outflow = X + Y debits + K inflow
M X + Y debits Y credits = K inflow K outflow (rearranged equation)
Balance on Current account = Balance on Capital and Financial account

are u talking about the movements in the exchange rate? saying that this will move the dollar to equilibrium price determined by market forces???

Or

are u saying because of the floating exchange rate system the BOP is self-correcting due to market forces determing blah blah.... im full confused here... please help... i got my half yearlies in like 2 days :|

GOOD POST BTW!!! *thumbs up*

 

[aditya]

and also... whats teh sense in the time being in GMT :S

i dun get that....

i mean on this forum lol...

 

[Turner]

Originally posted by AGB
no...prior to the floating of the dollar, the balance of payments never balanced!

Yeah, but do you have any figures/textbook that says that?

Originally posted by aditya
and also... whats teh sense in the time being in GMT :S
i dun get that....

i mean on this forum lol...

You can change it in your profile.

 

[aditya]

dunt i feel like a nob :|




(sum1 PLZ!!! asnwer my question)

 

[George W. Bush]

credits = demand
debits = supply
demand = supply (flexible exchange rate)
credit = debits

easy addison

 

[classic69]

there is something called NET ERRORS AND OMISSIONS.

**this item is on the CAPITAL and FINANCIAL account (at the bottom)

**it is very small, usualyy around 0.4

** its a balancing item.

** IT IS USED TO BALANCE CAD with KAS

 

[Grey Council]

urm, yes there is. But its exactly what it says it is.

net errors. As the BoP ALWAYS balances, the calculations may not show it to balance. So they "add"/"subtract" a certain amount, because it isn't balancing. Reason? calculation error somewhere.

 

[AGB]

look, if people understand the theory that i posted on the 3rd page of this thread about the bop, then examiners will be very impressed if you can somehow incorporate it into your essays/short answers. it is the correct explanation as to why the bop balances.

if you want to write down in your exams that it is the net errors and ommissions component that balances the bop, or that the floating exchange rate has absolutely nothing to do with it, then go ahead, but i can assure you that you will lose marks.