BoP impact exchange rates or exchange rates impact BoP? (1 Viewer)

[Triage]

Everything is in the title.

 

[Fawun]

Exchange rates impact balance of payments

Appreciating exchange rate --> lower demand for our exports --> less export income --> less capital inflows (credits) into our current account and vice versa and its similar for investment where a high dollar makes investment in australia more attracrive because of higher returns and that impacts on the financial account of the BOP

 

[Bumbletiger]

What the above poser said ^

Appreciation of the $A will increase foreign currency price of Australian exports making it less internationally competitive, however the Australia dollar value of imports will fall (as the $A can buy more foreign currency) increasing demand for imports..Thus worsening the BOP as they are greater outflows($ paid for imports) than inflows($ made from exports).
Conversely, a depreciation of the $A will decrease the foreign currency price of Australian exports making it more internationally competitive (because it's cheaper), however the $A value of imports will rise (as the $A can buy less foreign currency) decreasing demand for imports..Thus improving the BOP as there are greater inflows ($ made from exports) than outflows ($ paid for imports).

Thanks for making this thread & refreshing my memory after half-yearlies.

 

[Triage]

however, a large current account deficit on the balance of payments may discourage does a couple of things:

1. as previous 2 posters said, it is indicative of large capital inflow and therefor an appreciation in the dollar, thereby lowering australia's international competitiveness therefor worsening the balance on goods and services thereby worsening the exchange rate. (e.g. the automatic stabiliser effect).

2. A persistent current account deficit may lead to a decrease in investor confidence hence less inflow into Australia in the capital and financial account therefor less demand for $A therefor depreciation in the exchange rate.