Macroeconomices Term Paper Example | Topics and Well Written Essays - 1500 words

Macroeconomices - Term Paper Example These transactions enter as either debit items or credit items. The debit items include all payments to other countries: these include the countrys purchases of imports, the spending on investment it makes abroad and the interest and dividends paid to people abroad who have invested in the country. The credit items include all receipts from other countries: from the sales of exports, from inward investment expenditure and from interest and dividends earned from abroad. (John Solomon, Essentials of Economics, page 462-265) The sale of exports and any other receipts earn foreign currency. The purchase of imports or any other payments abroad use up foreign currency. If we start to spend more foreign currency than we earn, one of two things must happen. Both are likely to be a problem. The balance of payments will go into deficit. In other words, there will be shortfall of foreign currencies. The government will therefore have to borrow money from abroad, or draw on its foreign currency reserves to make up the shortfall. This is a problem because, if it goes on too long, overseas debts will mount, along with the interest that must be paid; and/or reserves will begin to run low. The exchange rate will fall. The exchange rate is the rate at which one currency exchanges for another. For example, the exchange rate of the pound into the dollar might be  £1= $1.60. When all the components such as current account, capital account, financial account of the balance of payments account are taken together, the balance of payments should exactly balance: credits should equal debits. If they are not equal, the rate of exchange would have to adjust until they were, or the government would have to intervene to make them equal. In order to achieve the goals of high and sustainable economic growth, low unemployment, low inflation, a satisfactory balance of payments and stable exchange rates,