User:Qamar Zaman 042

Exchange rate determination:--Qamar Zaman 042 (talk) 05:32, 20 March 2014 (UTC) We will attempt to explain the behavior of exchange rates by analyzing the behavior of supply and demand in the foreign exchange rate market. We emphasized that exchange rates are just prices that are determined by supply and demand considerations. An imbalance in any market is corrected by an adjustment in price and/or quantity. In currency markets, excess demand or excess supply will be corrected by a change in exchange rates. We will present two different models that explicitly incorporate different views of the market for exchange rates: the balance of payment approach and the monetarist approach. The balance of payment approach treats exchange rates as determined in flow markets, while the asset approach treats exchange rates as any other asset price. Balance of Payments (BOP) Approach:--Qamar Zaman 042 (talk) 05:32, 20 March 2014 (UTC) Under the BOP approach, the domestic price of a foreign currency is determined just like the price of any commodity, i.e., by the intersection of the market demand and supply curves for that foreign currency. The BOP approach models the demand and supply for foreign exchange as determined by the flows of currency created by international transactions. According to the BOP theory of exchange rates, the supply and demand for a currency arise from the flows related to the BOP, that is, trade in goods and services, portfolio investment, and direct investment. Equilibrium exchange rates are determined when the BOP is in equilibrium. Exchange rates will move in response to a BOP imbalance and, therefore, will restore the equilibrium to the BOP.

We should note that PPP implicitly incorporated, through trade, demand and supply factors in the determination of exchange rates. For example, under PPP, if prices abroad are lower than at home, then domestic demand for foreign goods will increase and then the foreign currency will appreciate. The BOP approach can be seen as encompassing the PPP approach. The BOP tracks all financial flows crossing the borders of a country during a given period. For example, an import creates a negative financial inflow (positive financial outflow) for the country, whereas an export creates a positive financial inflow (negative financial outflow). The convention is to treat all financial inflows as a credit to the balance of payments. A BOP is not an income statement or a balance sheet but rather a cash balance of the country relative to the rest of the world. As long as the country is not bankrupt, the balance of all financial flows must be equilibrated, like any cash balance. In other words, the final balance must be zero.

Example Consider a country whose only international transaction in the year 2000 consists of a USD 10 million import. This operation creates a negative USD 10 million inflow to the country. The importer could liquidate foreign assets worth USD 10 million to pay for this transaction. This operation creates a positive USD 10 million inflow to the country. Thus, the net balance will be zero. Of course, the importer could instead borrow USD 10 million abroad, creating a positive USD 10 million inflow to the country. The following table presents a summary of the U.S. BOP accounts for the year 2002 (in USD billions). Credits                            Debits Current Account (CA) Exports (X)                                                          1,229.649 Imports (M)                                                                                                 1,651.657 Unilateral transfers (UT)                                                                            58.853 Balance on CA (X+M+UT)                                                                         -480.861 Capital and Financial Account (KA) Capital Account Net                                                                                  -1.285 Financial Account U.S.-owned assets abroad (net change)                                               175.304 Foreign-owned assets in the U.S. (net change) 706,983 Balance on Financial Account (USOA+FOA)                                         531.679 Balance on KA (Capital + Financial Account)                                        530.394 Statistical discrepancy (SD)                                                                     -45.852 Overall balance (CA+KA+SD)                                                                    3.681 Official Reserve (OR)                                                                 - Balance on OR                                                                                           -3.681 The International Monetary Fund and the Central Bank sometimes propose the same on the grounds that it improves external competitiveness, increases exports, reduces imports and thus improves trade and current account balances. It is also argued that devaluation initially worsens but eventually improves balance of payments. Has Pakistan achieved these objectives? Have exports increased, and imports reduced? Has external payment situation improved as a result of depreciation? The scenario of Pakistan is different and unfortunately from past few years’ Pakistan economy is in threat as major sectors of the economy are showing negative growth. Although the exports were increased during FY11 but imports were also increased. According to the Federal Bureau of Statistics (FBS) the overall imports during FY11 were $40.414 billion as compared to$34.710 billion during FY10, which is an increase of 16.43 per cent. Increase in imports is mainly due to import of petroleum & its related products in the midst of fast depreciating exchange rate. In other words, contrary to the theory, a negative relationship between devaluation and external balance is observed.

On the other hand, the exchange rate depreciation has alone added Rs.1, 125 billion in public debt. At present it amounts to $13 billion. The rise in public debt would increase interest payment, reduce fiscal space for development spending and put enormous pressure on budget. Higher budget deficit would lead to even more accumulation of public debt. Recently Pakistani rupee depreciated to an all-time low Rs 106 against per dollar due to high demand for import payments. Depreciation of the rupee further inflates import bill as well as increases domestic price level, thus reducing the purchasing power of people and causing inflation in the country. It may be realized that for whatever reason our currency is depreciated, it results to weaken the economy as compared to the other countries. Further, excessive depreciation of the past has adversely affected our credit ranking in the international market. Summarizing the above discussion it can be said that depreciation is not a long-term solution to cobble together the economy. Unless the Government revises its economic policies and execution of plans, devaluation will not stabilize the external value of our currency. We must give highest precedence to the consolidation of our economy along with expansion.

ISLAMABAD: Pakistan’s Finance Minister Ishaq Dar said on Wednesday that recent appreciation of the rupee against the US dollar will have a positive impact on the prices of essential commodities. If dollar decrease in recent days Pakistani rupee has shown a remarkable recovery against the greenback on the back of some strong dollar inflows including $750 million from the Pakistan Development Fund helping the rupee to appreciate above 100-to-a-dollar level. If dollar prices 90 rupees then domestic and international confident has booster into investor investment into Pakistan. If dollar decrease then GDP growth has witnessed growth while Inflation is declining which has also been endorsed by various international financial institutions including the International Monetary Fund. Inflation level remained 8.6 percent while GDP remained 4.4 percent during the first eight months of current fiscal year.