balance of payments

• Balance of payments account records transactions between residents of that country and the rest of the world as either debit (payments to other countries) or credit (receipts from other countries) items.
• If imports more goods and services than exports = current account deficit, if government does nothing to correct exchange rate of currency will fall, pushes up price of imports reducing people's purchasing power can cause inflation.

  Exports more goods and services than it imports has a current account surplus 
• Current account- records payments for imports and exports of goods and services as well as money flowing in and out of the country plus net transfers.
• Capital account- records flows of funds into and out of country associated with acquisition or disposal of fixed assets
• Financial account- cross-border changes in holdings of shares, property, bank deposits and loans and government securities. Direct investment, portfolio investment and other financial flows.
• Exchange rate is changed in line with supply and demand (floating exchange rate) to balance this so they are not left with any amount of unsold currency. To gain an overall picture of fluctuations it is best to look at the weighted average known as the exchange rate index. A fall in exchange rate is called a depreciation, a rise is called an appreciation. the more of a foreign currency that dealers are asked to supply the lower the exchange rate they will offer.