5 of 27

Write now Article Tools

Page 2 of 2

of accounting to understand where a country's BOP stands. The CAB is mainly determined by income generated by exports and expenditures generated by imports. The KAB is determined by what assets a country buys or sells and how much borrowing versus lending a country does. When BOP equals zero, then a country is in a good economic position.

The value of a countries currency is ultimately determined by supply, demand, and the BOP. Supply is determined by the federal government, after all, they are the only ones who can print money or alter the interest rate. Demand is determined by the people based on both their spending and investing habits. The BOP is calculated based on the current state of the national economy. All three of these factors, together, determine the value of a countries currency. Envision supply and demand as two intersecting lines. One line has a positive slope while the other negative. Where these two lines meet a horizontal line representing BOP should cross. When all is at equilibrium the currency would be stable at a given point in time. The problem is we are not in a perfect world. Every factor that determines supply, demand, and the balance of payments is constantly changing. What makes currency even more volatile is the fact that exports and imports help determine the BOP. That simply means supply and demand are subject to the world economy. When changes occur nothing is at equilibrium and must re balance itself and that is why currency appreciates or depreciates in value.

Learn more about this author, Anthony Klika.
Click here to send this author comments or questions.

• << previous page
• 1
• 2

Add your voice

Know something about Why is the American dollar losing value??
We want to hear your view. Write now!