Balance of Payments and the
Exchange Rate
Chapter 19
Financing International Balance Of Payments
Trade Summary of all transactions
EXCHANGE RATE refers 2 that took place between
rate of exchange of 1’s individuals, firms &
nation’s currency 4 another government units of 1 nation &
nation’s currency. 1 factor those of all other nations
makes international trade diff during year.
from domestic trade = Current Account
involvement of diff national section in a country’s
currencies. When SA firm international balance of
exports goods 2 European payments that
firm, SA exporter wants 2 be records its
paid in rand, but European 1. exports and imports of
importer possesses euros. goods and services,
Importer must exchange 2. its net investment income
euros for rand before the SA 3. its net transfers.
export transaction can occur. BALANCE ON GOODS
SA Export Transaction Trade balance –difference
SA exports create foreign between the country’s
demand 4 rand & fulfilment of exports and imports of goods
demand increases supply of Trade surplus – if exports
foreign currencies owed by exceed imports
SA banks and available to SA Trade deficit – if imports
buyers. exceed exports
SA Import Transaction BALANCE ON SERVICES
SA imports create domestic South African exports
demand 4 foreign currencies services such as insurance,
& fulfilment of demand consulting, travel & brokerage
reduces supplies of foreign services to residents of
currencies held by SA banks foreign nations as well.
& available 2 SA consumers.
, BALANCE ON INCOME Financial Account
PAYMENTS Section in a nation’s
South African citizens and international balance of
companies also earn income payments that records
abroad and at the same time international transactions in
foreigners and foreign assets and liabilities and
companies earn an income in consists of three separate
South Africa. sections:
BALANCE ON CURRENT (1) direct investment,
ACCOUNT (2) portfolio investment and
Difference between SA (3) other investment.
exports of goods, services, DIRECT INVESTMENT
income and SA imports of all transactions where the
goods, services, income plus purpose of the investor is to
or minus the net transfer gain control or have a
meaningful say in management
of the enterprise
PORTFOLIO INVESTMENT
includes the trade in shares,
bonds, short- and long-term
capital and money market
stocks where the investor is
only interested in the
expected financial return on
the investment
OTHER INVESTMENT
includes all financial
transactions not included in
the previous two items
BALANCE OF THE
FINANCAIL ACCOUNT
add up three accounts: direct
investment, portfolio
investment and other
investment
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