WHAT IS BOP

The balance of payments (BOP) is a statement of all transactions made between entities in one
country and the rest of the world over a defined period of time, such as a quarter or a year.

The balance of payments has three components. They are the current account, the financial account,
and the capital account. The current account measures international trade, net income on
investments, and direct payments. The financial account describes the change in international
ownership of assets. The capital account includes any other financial transactions that don't affect
the nation's economic output.

BOP statement of a country indicates whether the country has a surplus or a deficit of funds i.e
when a country’s export is more than its import, its BOP is said to be in surplus. On the other hand,
BOP deficit indicates that a country’s imports are more than its exports.

DEMAND SUPPLY FOREXCHANGE:

The foreign exchange rate is determined in the free foreign exchange markets by the forces of
‘demand and supply for foreign exchange.

Generally, the demand for foreign currency arises from the traders who have to make payments for
imported goods. If a person wants to invest his capital in foreign countries, he requires the currency
of that country. The functional relationship between the quantity of foreign exchange demanded
and the rate of foreign exchange is expressed in the demand schedule for foreign exchange (which
shows the different rates of foreign exchange). It is understood from the demand schedule that the
relationship, between the quantities of the foreign exchange demanded that the rate of foreign
exchange is inverse in such a way that a fall in the rates of exchange is followed and inverse in the
quantity of the foreign exchange demanded. The main reason for this relationship is that, a higher
rate of foreign exchange by rendering imports more expensive reduces the demand for them and
consequently, also reduces the amount demanded of foreign exchange which is required to pay for
imports. On the other hand, a lower rate of exchange by making the imports cheaper causes the
demand for them to rise and consequently increases the demand for foreign exchange needed to
pay for higher imports.

The Supply of Foreign Exchange

The need for and supply of foreign currency arises from the exporters who have exported goods and
services to foreign countries. The supply schedule or curve of foreign exchange shows the different
quantities of foreign exchange, which would be available at different rate of foreign exchange, in the
foreign exchange market. The sources of supply of foreign exchange depend largely upon the
decisions of foreigners. The total quantity of the different goods and services, which a country can
export and, therefore, the quantity of foreign currencies which it can acquire depends upon how
many the residents of the foreign currencies are willing to import from a particular country.