Balance of Payments and its Equilibrium Free Essay Example, 2500 words

In theory, the total between the current and financial accounts is zero (Wang, 2009, p. 80; Van den Berg, 2010, p. 67; Snowdon and Vane, 2002, p. 28). This only means that adding these two components should zero each other out. However, this is not usually met in the real world considering the point that the current account will either reach a point of deficit or surplus. If they cannot balance each other, the official reserves will be to the rescue in order to obtain the balance. However, theoretically, the BOP will always reach its balance. The surplus in BOP corresponds to the current account surplus (Daniels and VanHoose, 2012, p. 164; Moosa, 2012, p. 16; Glanville and Glanville, 2011, p. 384). The BOP deficit also implies current account deficit (Tragakes, 2011, p. 400; Wang, 2009, Reddy, 2004, p. 42). If the deficit takes place in the current account, the BOP deficit is therefore remarkable. This implies that there is an excess of the domestic currency. In another way of sayin g it, the domestic currency is losing its value. This further means that the government is buying its own currency and it is selling foreign currency (Levi, 2009, p. 157; Carbaugh, 2013, p. 406; Somanath, 2011, p. 52). We will write a custom essay sample on Balance of Payments and its Equilibrium or any topic specifically for you Only $17.96 $11.86/page As stated and from an accounting perspective, BOP leads the current and capital accounts to zero when added up together. Concerning this, there must be no significant impact on the exchange rate (Charusheela, 2013, p. 142).