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    Connection with balance of payments framework and exchange rates

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    1. Propose the connection between the balance of payments framework and exchange rates.
    2. Propose the similarities and differences of current account and financial account in the balance of payments structure. In doing so, apply your analysis to explain the trade balance between U.S, and China.
    3. Critique and assess the gold standard and its role in regard to monetary policy and the international monetary system.
    4. Propose the importance of the financial account (from the BOP) to economic indicators.

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    Solution Preview

    In the following discussion there will be an exploration of the connection between the balance of payments and exchange rates regarding the domestic price and demand and supply of money. There will also be a discussion over the financial account and current account as part of balance of payments.

    Answer 1

    The connection between the balance of payments framework and exchange rates can be viewed with respect to fluctuations in the exchange rates that affect the balance of payments. The fluctuations in the exchange rates affect the balance of payments only and not any other variable such as trade balance. The changes in the exchange rates result in changes in the domestic prices and demand and supply of money within a country. Devaluation of the exchange rates results in a surplus of the balance of payments because of the rise in domestic prices that cannot be satisfied with the money flow within a country. In this situation, there is a need for money inflow from abroad, and it creates a surplus in the balance of payments (Arize, 2000).

    In the same context, the appreciation in the exchange rates affects the domestic price results by the reduction in money flow within the country. It needs to outflow of the money abroad resulting in a deficit in the balance of payments. The exchange rates can only affect the balance of payments because there is no impact on the net wealth and other economic variable including trade balance. Therefore, there is a direct link between the balance of payments and exchange rates in terms of appreciation and devaluation of exchange rates with surplus and deficit of the balance of payments (Wang, 2009).

    Answer 2

    The current account and the financial account are parts of the balance of payments because the balance of payments records each and every transaction between domestic country and other countries. The current account provides all the detailed transactions of exports and imports of goods ...

    Solution Summary

    The connection with balance of payments framework and exchange rates are examined. The response addresses the query posted in 1112 words with APA References.

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