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Factors affecting Balance of payment of ay country There are various factors that affect current account, capital account

and official reserve account and thus the balance of payment. Exchange rate: Generally exchange rate affects both the current account items of BoP account. Depreciation or devaluation of domestic currency will boost the competitiveness of the country to export goods and services. Due to depreciation in domestic currency against foreign currency will lure non residents to import goods and service from that country as the price of exporting form that country competitively will be lower than those of the country with strong domestic currency. This may lead to BOP surplus.

Interest rate: interest rate is another factor that affects the balance of payment. Generally it affects the investment opportunity in any company. If the interest rate rises while other variables remain constant non residents would like to deposit or invest in that country to take advantage of the higher interest rate. The capital inflow increases with the increment of FDI and other investment which is surplus on credit side. If the foreign exchange rate reverses the whole situation will again reverse and lead to capital deficit.

Government spending: Government spending of particular country also affects the balance of payment of that country. Reduction in government spending can reduce the domestic demand that creates an incentive and spare capacity for domestic business to export overseas. Export of domestic product may improve balance of payment surplus.

Tax policy and subsidiaries in foreign trade: governments tax policy and subsidiaries to the exporter and importer also have major impact on balance of payment. If government provides tax benefit and subsidiaries to export goods and services meanwhile strict to the imports, it may speed up export while slowdown the import activities and vice-versa.

Export-oriented growth: Some countries have set out to increase the capacity of their export industries as a growth strategy. They appreciate to Invest in production of export oriented goods and services by which economies of scale can be exploited, unit costs driven down and comparative advantage can be developed and export more goods and services than import.

Domestic savings rates: Domestic saving rate is also a attributable variable to determine current account surplus and deficit. For example China has a high household saving ratio and a huge trade surplus; in contrast the savings ratio in the United States has collapsed and their trade deficit has got bigger. In this way domestic saving alter the current account and thus the balance of payment of any country.

Availability and utilization of resource: Country with high level of competent human capital and other resources can either utilize in their country or export to other country. From both the nation can get cash inflow. So, availability of resource is also a determining factor of balance of payment.

Natural effects of the economic cycle: The balance of payment is also affected by the change in stages of economic cycle. Generally trade deficit would expected to be fall during a recession and vice-versa.