Modeling the Exchange Rate and Balance of Payments Essay

Modeling the Ex transmute Rate and Balance of Payments - turn up ExampleMany countries use financial institutions, central banks, to invest in several monetary and financial systems and other resources in their quest to predict alter regulate and determine international trade as well as a balance of payment. Several theories have been forwarded to determine the value of exchange rate and balance of payments, and in this summary, we will discuss the determinants of a balance of trade, the IS-LM-BP approach and the monetary approach in relation to the two (Melvin and Norrbin, 225).The elasticity approach to the balance of trade explains that the economic behavior involves satisfaction of the measureless wants with limited resources. One effect of this is that consumers and business firms end up substituting the expensive good for the more than affordable ones as prices change to stretch their budgets as far as they can. Relative prices usually change relative to demand and suppl y for individual goods. Such changes may be caused by an alteration in tastes, the method of production, government taxes, or subsidies amongst other possible causes. If the changes concern the prices of goods at home relative to the outside goods, the international trade patterns may actually be altered. The elasticity approach to the balance of trade involves the modality changing of relative prices of the domestic and foreign goods will affect and possibly change the balance of trade. Furthermore, it provides an outline of how the issue of devaluation affects the balance of trade in relation to the elasticity of supply and demand for foreign exchange and foreign goods in the concerned market (Melvin and Norrbin 226).The devaluation of a countrys currency domestically normally raises the price of foreign goods in relation to the domestic goods within that country.