Balance of

payments and
Exchange Rates
Balance of payments & exchange rates

The balance of
payments account
Example of UK balance of
payments
Balance of payments & exchange rates

The balance of
payments account
The current account
UK balance of payments: 2001 (£ millions)
UK balance of payments: 2001 (£ millions)
UK balance of payments: 2001 (£ millions)
UK balance of payments: 2001 (£ millions)
UK balance of payments: 2001 (£ millions)
UK balance of payments: 2001 (£ millions)
 Current account balance as % of
GDP in selected countries: 1970–2003
5

4
Current account balance:% of GDP

-1

-2

-3

-4
 Current account balance as % of
GDP in selected countries: 1970–2003
5

4
Current account balance:% of GDP

1
UK
0

-1

-2

-3

-4
 Current account balance as % of
GDP in selected countries: 1970–2003
5

4
Current account balance:% of GDP

1
UK
0

-1

-2 USA

-3

-4
 Current account balance as % of
GDP in selected countries: 1970–2003
5

4
Current account balance:% of GDP

3
Japan
2

1
UK
0

-1

-2 USA

-3

-4
Balance of payments & exchange rates

The balance of
payments account
The capital account
UK balance of payments: 2001 (£ millions)
Balance of payments & exchange rates

The balance of
payments account
The financial account
UK balance of payments: 2001 (£ millions)
UK balance of payments: 2001 (£ millions)
UK balance of payments: 2001 (£ millions)
UK balance of payments: 2001 (£ millions)
Balance of payments & exchange rates

The balance of
payments account
The overall
balance of payments
UK balance of payments: 2001 (£ millions)
UK balance of payments: 2001 (£ millions)
Balance of payments & exchange rates

Exchange rates
Sterling exchange rates: 1980–2003
Sterling exchange rates: 1980–2003
Sterling exchange rates: 1980–2003
Sterling exchange rates: 1980–2003
Balance of payments & exchange rates

Exchange rates
Determination of the
exchange rate
 Determination of the rate of exchange

2.20

2.00
$ price of £

1.80

1.60

1.40

1.20
Q of £
 Determination of the rate of exchange

2.20

2.00
$ price of £

1.80

1.60

1.40
D by USA

1.20
Q of £
 Determination of the rate of exchange
S by UK
2.20

2.00
b a
$ price of £

1.80

1.60

1.40
D by USA

1.20 QS
QD Q of £
 Determination of the rate of exchange
S by UK
2.20

2.00
$ price of £

1.80

1.60 d c

1.40
D by USA

1.20
QS QD Q of £
Balance of payments & exchange rates

Exchange rates
Changes in the
exchange rate
 Floating exchange rates: movement to a new equilibrium

S1
1.80

1.60
€/£

1.40

1.20
D1

1.00

0.80
Q of £
 Floating exchange rates: movement to a new equilibrium

S1
1.80

S2
1.60
€/£

1.40

1.20
D1

1.00

0.80
Q of £
 Floating exchange rates: movement to a new equilibrium

1.80
S1

S2
1.60
€/£

1.40

1.20
D1

1.00
D2

0.80
Q of £
Balance of payments & exchange rates

Exchange rates
Speculation against
exchange rate movements
 Stabilising speculation
S1

er1
Exchange rate

D1

O
Quantity of £s
 Stabilising speculation
S1
S2

er1
Exchange rate

er2

D1
D2
O
Quantity of £s
 Stabilising speculation
S1 S3
S2

er1
Exchange rate

er3

er2

D1
D2 D3
O
Quantity of £s
 Destabilising speculation
S1

er1
Exchange rate

D1

O
Quantity of £s
 Destabilising speculation
S1 S2

er1
Exchange rate

er2

D1
D2
O
Quantity of £s
 Destabilising speculation
S1 S2
S3

er1
Exchange rate

er2

er3

D1
D3 D2
O
Quantity of £s
Balance of payments & exchange rates

Exchange rates
Movements in the sterling
exchange rate over time
 $ / £ exchange rate and £ exchange rate index: 1976-2003
$/£
$2.40

$2.20

$2.00

$1.80

$1.60

$1.40

$1.20
 $ / £ exchange rate and £ exchange rate index: 1976-2003
$/£
$2.40

$2.20

$2.00

$1.80

$1.60

$1.40

$1.20
 $ / £ exchange rate and £ exchange rate index: 1976-2003
Index
$/£ 1990=100
$2.40

$2.20

$2.00

$1.80

$1.60

$1.40

$1.20
 $ / £ exchange rate and £ exchange rate index: 1976-2003
Index
$/£ 1990=100
$2.40

$2.20

$2.00

$1.80

$1.60

$1.40

$1.20
Balance of payments & exchange rates

Exchange rates
Movements in the
dollar/euro exchange rate
from 1999 to 2003
Fluctuations between the euro and the dollar
Fluctuations between the euro and the dollar

US interest
rate
Fluctuations between the euro and the dollar

US interest
rate

ECB
interest rate
Fluctuations between the euro and the dollar

US interest
$/€ rate

ECB
interest rate

$/€