The Elasticity Approach to Balance of Payments

The value of the country 's currency depends on the country' s overall economy. This includes manufacturing, foreign investment, employment, trade balance and many other economic indicators. All transactions between that country and other countries are part of the balance of payments. Economists use a variety of tools to analyze and suggest ways to increase and decrease trade between countries and balance them

The balance of payments is an economic indicator used to judge the economic and political stability of the country. The balance of payments measures the import and export of finance and services, trade balance, and finance between countries and the rest of the world in a specific period. BOP compares all imports and exports including financial transactions and compares currency differences between transactions. If a country has a positive balance of payments it means that the country has more money from international trade and then disappears. On the other hand, a negative BOP indicates that a country will drain more funds through international trade and then enter.

Elasticity represents responsiveness. In economics, changing certain aspects of a product or service, resilience determines the change in demand. In most cases, the concept of resilience indicates that the demand for a product or service will change as the price rises or falls. A flexible approach to the balance of payments shows how changes in monetary value affect the balance of payments of the country

A flexible approach seeks to predict the impact of policy changes on the balance of payments. For example, this approach shows how the exchange rate affects balances. In addition, the flexible method assumes that if the BOP is balanced, the balance of payments will be improved by depreciation. However, in order to make depreciation of currency successful, it is necessary to increase the total price elasticity of domestic and foreign import demand. When a country devaluates that currency, it improves the balance of payments under ideal conditions. This ideal condition is called Marshallleerner condition.

Marshall-Lerner was named after British economist Alfred Marshall and Romanian economist Abba Lerner, and currency devaluation will eventually improve payment balance. However, in order to achieve an increase in the balance of payments, it is necessary to increase the elasticity of the total demand for imports and exports. When the country devaluates the currency, the export price goes down. In theory, this will increase the demand for these exports. However, in order to increase demand, export products must be elastic products.

Brian Bass wrote articles on Today's Account's accounting related topics and accounting trends. He is a senior auditor specializing in manufacturing and financial services companies, accounting firm of one of the top five companies. Master 's degree in Accounting from the University of Utah.

J curve effect describes the time lag in improving the trade balance caused by currency depreciation or depreciation. j The theoretical basis for the curve effect is the elasticity and payment balance method. According to theory, currency depreciation or currency depreciation is expected to improve the trade balance by changing the relative price of domestic and foreign goods (Carbaugh, 2008). As foreign products become expensive in the country and domestic products become cheaper overseas, the import demand will decrease and foreigners will buy more domestic exports.

Elasticity represents responsiveness. In economics, changing certain aspects of a product or service, resilience determines the change in demand. In most cases, the concept of resilience indicates that the demand for a product or service will change as the price rises or falls. The flexible approach to the balance of payments shows how the change in monetary value affects the balance of payments of the country. A flexible approach seeks to predict the impact of policy changes on the balance of payments. For example, this approach shows how the exchange rate affects balances. In addition, the flexible method assumes that if the BOP is balanced, the balance of payments will be improved by depreciation. However, in order to make depreciation of currency successful, it is necessary to increase the total price elasticity of domestic and foreign import demand. When the country devaluates that currency, it will improve the balance of payments under ideal conditions.