What is Balance of Payments Model Theory?


Balance of Payments Model theory suggests that a foreign exchange rate must be at its equilibrium level — the rate that produces a stable current account balance. Balance of payments is the sum of the balances of current account and capital account.

 Balance of payments (BoP) consist of two main accounts:

1. Current Account
2. Capital Account

1. Current Account: It is defined as the sum of the balance of trade (goods and services exports less imports), net income from abroad and net current transfers. A current account surplus points that the value of a country’s net foreign assets that is assets less liabilities grew over the period in question, and a current account deficit shows that it is reduced.

2. Capital Account: This is also called Financial account. It is a national account that shows the net change in asset ownership for a nation or a net result of public and private international investments flowing in and out of a country. A surplus in the capital account means money is flowing into the country.

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