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Balance Of Payments (BOP)

Most of exports and imports involve finance i.e. receipts and payments in money. An account of all receipts and payments is termed as Balance of Payments (BOP). All the transactions entered in the BOP can be grouped in 3 groups: -Trade account balance -Capital account balance -Current account balance -Foreign exchange reserves

Foreign Exchange Reserves


Stores of international currency held by the central banks of nations around the world. Primary purpose - The international settlement of debts. - Payments between governments. Effects exchange rates, international trade and inflation. Also called FOREX reserves.

Some Concepts Relating to FOREX


Official International Payments:
Use FOREX. Payments associated with military spending, Govt aids and loans. Countries stay committed to build strong FOREX reserves to - help to balance world economy. -stay good standing with allies.

Gold Standard & U.S Dollar:


Once only Gold & Silver are used for settlements. U.S was only one left untouched after the two world wars, so became the supreme power to make loans. So U.S Dollar also pegged in the International Exchange. Presently used mediums for exchange: -Gold -U.S Dollars. But still U.S Dollar is more dominant.

Uses of FOREX reserves


1. Exchange Rates:
Central banks trade domestic notes against foreign currency. International central banks create domestic currency and used to buy foreign exchange. Buying foreign currency by creating money devalues the home currency against that particular medium. Conversely, foreign central banks strengthen the home currency by releasing foreign currency back into the marketplace out of the reserves in exchange for the domestic currency, which is then taken out of circulation. The United States Federal Reserve Bank of New York manages the U.S. foreign exchange reserves on behalf of the U.S. Treasury.

2.International Trade:
Exchange rates affect international trade by influencing the prices of goods. Exports sell for low prices overseas when the domestic currency has been devalued. imports become more expensive when the home currency is weak. Central banks manipulate foreign exchange reserves for competitive advantages. Export economies add to foreign exchange reserves in order to devalue the home currency and sell cheap goods overseas. Ex: China leads the world in foreign exchange reserves and carries over $2 trillion in U.S. dollars, which effectively devalues the Yuan and drives China's export economy.

3. Inflation and loss:


Fiat currency, which identifies money that is not backed by gold, is always susceptible to long-term devaluation, or inflation. Inflation identifies the loss of purchasing power that occurs over time.

Nations that hold large amounts of foreign currency incur losses in


purchasing power as the exchange values of that currency decrease. Foreign exchange reserves earn little in terms of interest.

The interest income will not overcome the losses realized from
holding depreciating currency.

BOP Statistics released by RBI on 31-12-12

Conclusion
FOREX reserves play a key role in the Balance of payments. So every country should improve their reserves by improving their capital investments and international trade.

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