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Balance of payment is an important section of the national economy of a country. It constitutes a major part. The report will primarily highlight the importance and relevance of balance of payment. Further it will emphasize on one of its approaches and will depict the importance of that approach in the present business environment. However in this respect, the elasticities approach will be highlighted. Similarly its relevance in the present business environment will be discussed. Nevertheless before getting into the discussion a brief overview of balance of payment is presented below:-
The Balance of payment (BOP) can be referred to as one of the economic indicators which are mainly used to determine the political and economical stability of a country (Nayak 172). It takes into account the trade balance, financial transactions with the other countries for a specific period of time. Apart from this balance of payment distinguishes all the exports and imports, which embraces all the financial transactions, and it also differentiates monetary differences of the economic transactions. Now in the context of a country, if it has a positive BOP, then it signifies that a country has more funds coming in from the international trade than going out. While negative BOP illustrates that, a country has more funds flowing out than coming in.
Elasticities approach is an approach of BOP that tries to predict the outcome after the impact of policy changes on BOP. In order to cite an example, elasticities approach primarily shed light on the impact of exchange rate on the balance. Furthermore, if the balance of payment is in equilibrium state, the elasticities approach assumes that the devaluation can certainly enhance BO (Gagnon, “Long-run supply effects and the elasticities approach to trade”). However devaluation to perform successfully, price elasticities of foreign demand of import and domestic demand has to
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