Exchange Rate and Balance of Payments

Topics: Purchasing power parity, United States dollar, Inflation Pages: 4 (1372 words) Published: March 31, 2008
1.We chose Japanese Yen as are benchmark exchange rate because Japan is part of the G-10 Countries with U.S. and one of the major economies in the world. Japan is also a Key U.S. Business Partner in importing and exporting goods and services. Through our findings we have developed our insight of the Japanese Yen being very volatile to the dollar. In the graph shown below, we can conclude that from 1995 till 1999 the Japanese yen was weaker against Dollar. The process has been repeated between the years 2001-03 and 2006-recent.

2.Balance of Current Account shows one country’s Export and Import in Goods and services. In the U.S. case since 1995 the Balance of Current Accounts has been constantly growing deficit as shown in the Graph Below.

3.The relationship between the Balance of the Current Account and the Exchange rate is that they coincide with each other. When an Exchange rate of one nation’s currency decreases against the other, the exports of that country will increase and Imports decrease and Vise versa. For Example if the Dollar Depreciate against major world currencies then the U.S. Exports will then Increase and Imports will Decrease, leading to a Current Account Surplus.

4.What we found from the first two findings state is the U.S. Overall Current Account Deficit does not match the U.S.-JAP X-Rate. Since 1995 the Deficit has increased constantly but the Japan X-rate has been up and down, and doesn’t match with the relationship explained in part three. If we compare the Current Account Deficit with only Japan adjacent to the X-Rate, we can conclude the findings match with our explanation in part three. In the Graph below we can see that between years 1995-99 Dollar was continuously increasing against the Yen which led to an increase in the Current accounts Deficit during that period with Japan. During the period of 2001-2003, the U.S. went through a recession. The deficit decreased because of less consumption of imports and a weaker...
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