Question

Explain the current account view of the ER determination.

Answer 1

We'll first understand about current account of balance of payments. Balance of payments is configured where a deficit is balanced by the surplus. Balance of payment has two accounts vis a vis Capital and Current Account. Nation's health of trades rely mostly on good balance of payments structure. These current account uses some models namely Purchase power parity, Absorption approach and Elasticities Approach. In Foreign exchange, the exchange rate is determined by each Nation's central bank, and is highly influenced by the demand and supply of the currency. In purchase power of parity model, it explains, that the exchange rate if fallen will be equal to the appreciation and a rise will indicate to the depreciation, hence the purchase power of parity is based on law of one price. This means the foreign exchange rate is determined by the two currencies and it's each purchase power of parity.