Balance of Payments

1) The balance of payments is a statement that shows the total of economic transactions of individuals, businesses and government agencies located in one country with those located in the rest of the world during a period of time.

Please discuss the following questions:

a.  In a freely floating exchange rate system, if the current account is showing a deficit, discuss  the consequences for the nation’s balance on capital account and its overall balance of payments?

b.  As the value of the U.S. dollar increase in value, what is the effect on the U.S. balance on current account? Explain.

c.  If the U.S. current-account deficit increases, discuss the effect on the value of the dollar. Please discuss in detail.

2) Financial analysts suggest that the appreciation of a currency is directly related to the expectations that economic conditions will strengthen.  Do you agree or disagree. Please explain your discussion. In the meantime, others suggest that when other factors are held constant, increased national income could increase imports and cause the local currency to weaken.  In reality, other factors are not constant.  Discuss what other factor is likely to be affected by increased economic growth and could place upward pressure on the value of the local currency?