{"id":20911,"date":"2023-01-29T17:12:10","date_gmt":"2023-01-29T17:12:10","guid":{"rendered":"https:\/\/analystprep.com\/study-notes\/?p=20911"},"modified":"2026-03-02T11:42:09","modified_gmt":"2026-03-02T11:42:09","slug":"balance-of-payments-and-foreign-exchange","status":"publish","type":"post","link":"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/balance-of-payments-and-foreign-exchange\/","title":{"rendered":"Balance of Payments and Foreign Exchange"},"content":{"rendered":"<script type=\"application\/ld+json\">\r\n{\r\n  \"@context\": \"https:\/\/schema.org\",\r\n  \"@type\": \"QAPage\",\r\n  \"mainEntity\": {\r\n    \"@type\": \"Question\",\r\n    \"name\": \"What causes a current account surplus?\",\r\n    \"text\": \"Current account surplus is most likely a result of:\\n\\nA. Exports exceeding imports.\\n\\nB. Imports exceeding exports.\\n\\nC. Exports being equal to imports.\",\r\n    \"answerCount\": 1,\r\n    \"acceptedAnswer\": {\r\n      \"@type\": \"Answer\",\r\n      \"text\": \"The correct answer is A. A current account surplus occurs when exports of goods, services, and income exceed imports. The current account reflects trade in goods and services, investment income, and transfers between countries.\"\r\n    }\r\n  }\r\n}\r\n<\/script>\r\n<p><iframe loading=\"lazy\" src=\"\/\/www.youtube.com\/embed\/jeWnVqcAZNs\" width=\"611\" height=\"343\" allowfullscreen=\"allowfullscreen\"><\/iframe><\/p>\r\n\r\n<p>The <strong>balance of payments<\/strong> (BOP) is used to track transactions between a country and its international trading partners. It can be viewed as an accounting statement that captures all payments made to foreigners and liabilities incurred by them. BOP also shows all payments and obligations received from foreigners.<\/p>\r\n<p>A country\u2019s balance of payments consists of its current account as well as its capital<br \/>\r\nand financial account.<\/p>\r\n<p>The<strong> current account<\/strong> measures the exchange of goods, services, investment income, and unilateral gifts.<\/p>\r\n<p>$$ \\text{Current account surplus \u2013 Exports &gt; Imports} $$<\/p>\r\n<p>$$ \\text{Current account deficit \u2013 Imports &gt; Exports} $$<\/p>\r\n<p>The<strong> financial account <\/strong>(<strong>capital account<\/strong>) measures the <strong>flow of funds<\/strong> for debt and equity investment into and out of a country.<\/p>\r\n<h3>Influence of the Current Account on Exchange Rates<\/h3>\r\n<p>A country&#8217;s current account trend influences the path taken by exchange rates over time through the following mechanisms:<\/p>\r\n<p>$$ {\\begin{array}{l|l} \\text{The flow supply or demand channel} &amp; {\\text{A country that exports more than} \\\\ \\text{it imports will see an increased}\\\\ \\text{demand for its currency, resulting}\\\\ \\text{in currency appreciation.}}\\\\ \\hline \\text{The portfolio balance channel} &amp; {\\text{A country operating at a trade } \\\\ \\text{surplus will have more of a deficit}\\\\ \\text{ country&#8217;s currency than it wants,}\\\\ \\text{resulting in downward pressure on}\\\\ \\text{the deficit country&#8217;s currency.}} \\\\ \\hline \\text{The debt sustainability channel} &amp; {\\text{If a country runs persistent deficits,} \\\\ \\text{it will be indebted to foreigners}\\\\ \\text{and its currency will be depreciated}\\\\ \\text{so that the current account deficit} \\\\ \\text{narrows.}} \\\\ \\end{array}}$$<\/p>\r\n<h3>Influence of the Capital Account on Exchange Rates<\/h3>\r\n<p>Capital account balances have a more immediate effect on exchange rates relative to current account balances.<\/p>\r\n<p>Excessive capital inflows in Emerging Markets (EM) catalyze boom-like conditions such as:<\/p>\r\n<ol>\r\n\t<li>Appreciation of emerging market currencies.<\/li>\r\n\t<li>A great buildup of external debt by emerging market governments and businesses.<\/li>\r\n\t<li>Overinvestment in risky projects.<\/li>\r\n\t<li>Market bubbles.<\/li>\r\n<\/ol>\r\n<blockquote>\r\n<h2>Question<\/h2>\r\n<p>Current account surplus is <em>most likely<\/em> a result of:<\/p>\r\n<ol style=\"list-style-type: upper-alpha;\" type=\"A\">\r\n\t<li>Exports exceeding imports.<\/li>\r\n\t<li>Imports exceeding exports.<\/li>\r\n\t<li>Exports being equal to imports.<\/li>\r\n<\/ol>\r\n<h4>Solution<\/h4>\r\n<p><strong>The correct answer is A<\/strong>.<\/p>\r\n<p>The current account measures the exchange of goods, services, investment income, and unilateral gifts.<\/p>\r\n<p>A current account surplus occurs when exports are greater than imports. On the other hand, a current account deficit is a result of imports being greater than exports.<\/p>\r\n<\/blockquote>\r\n<p>Reading 8: Currency Exchange Rates: Understanding Equilibrium Value<\/p>\r\n<p><em>LOS 8 (j) Explain how flows in the balance of payment accounts affect currency exchange rates.<\/em><\/p>\r\n","protected":false},"excerpt":{"rendered":"<p>The balance of payments (BOP) is used to track transactions between a country and its international trading partners. It can be viewed as an accounting statement that captures all payments made to foreigners and liabilities incurred by them. BOP also&#8230;<\/p>\n","protected":false},"author":4,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[102,494],"tags":[506,216,502,503],"class_list":["post-20911","post","type-post","status-publish","format-standard","hentry","category-cfa-level-2","category-economics","tag-balance-of-payments-and-foreign-exchange","tag-cfa-level-2","tag-economics","tag-reading-10-currency-exchange-rates","blog-post","no-post-thumbnail","animate"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v26.9 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Balance of Payments &amp; FX | CFA Level 2<\/title>\n<meta name=\"description\" content=\"Learn how the balance of payments relates to foreign exchange rates, capital flows, current account balances, and currency movements in CFA Level 2.\" \/>\n<meta name=\"robots\" content=\"index, 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