how is foreign exchange rate calculated what is balance of payments? tel me a site for lucid explanation.?

Question

i have searched wikipedia and swam through google. but i could not get a site which would give answer in simple language. i need it to be simple because i have an engineering and not an economic background. but i need this for an examination. so please help me in this regard

Answer 1

A courntry's "BALANCE OF PAYMENTS" is a systematic account of all the exchanges of value beteen residents of the country and the rest of the world during a given time period. Two flows occur in any exhange, or transaction, according to the double - entry bookkeeping:

1. A credit (+) is a flow for which the country is paid.
2. A debit (-) is a flow for which the country must pay.

Flows from international transactions are grouped into five flow categories. Each category contains flows of more detailed types ... The five flow categories, with some important subcategories are:

1. Merchandise trade flows (ie goods flows)
2. Service flows, including payments for investment services (earnings of interste, dividends, profits), fees and toyalties, transportation and insurance and trave services;
3. Unilater transfers, including government forein-aid grants and private gifts and remittances;
4. Private capital flows, including direct foreign investments, portfolio investment in securities, changes in bank deposits, changes in other financial claims, and statistical discrepancy;
5. Official asset flows, including changes in offical gold and foreign exchange assets, in Special Drawing Rights (SDRs) with the IMF, and in offical liabilits to foreigners.

Th curren taccount balance has specail macroeconomic meaning. As net foreign investments (Ia), of Invsetment it equals the part of the national savings (S) that is not used in domestic capital formation (Ib). That is, it fits into the basic identity that savings equals investment: S = Ia + Ib. A nation that is running a current account deficit, like the USA (since 1976) is a nation that is saving less than its domestic capital formation, so that the current account deficit represents its net foreign borrowing. Viewed antoehr way, a net current-account deficit represents intertemporal trade, with the nation use and promising to repay with net exports or goods and services (and gratitude for any gifts) in the future.

The overall balance also has special macroeconomical meaning, through its actual definition cannot quite match the concept it is supposed to represent. One idea is that an overall surplus shows the nation has a net demand for holding foreign money, while the rest of the world willingly supplies that money in exchange for other things. The overall balanc is thus viewed as a measure of temporary diequilibrium in the foreign-exchange marktets.

Answer 2

the foreign exchange rate is determined by the market for money, which is a market like any other commodities market. The rate of exchange is determined like any other market, by the demand and supply for a particular currency relative to substitutes, in this case other currencies. A country's credit, its borrowing, the rate of inflation of the money all affect the exchange rate.
I wrote about this issue in a previous thread here because someone else had a simila question. The easy answer is that the exchange rate isdetermined by the market supply and demand for a currency in the money market. The hard/complicated response is that what a currency is valued at (its exchange rate= relative value of other currencies) will depend on socio-econmic factors in really all the countries of the world as well as world prices for basic goods, inflation, etc. Hope that helps at least some.