Current Account and Exchange Rate (HL only)
Balance of Payments
AO2·AO4·Diagram required·HL
Syllabus requirement
How a current account deficit or surplus influences the exchange rate through supply/demand for currency.
Assessment objectives
AO2 Application and AnalysisAO4 Use of Appropriate Skills
Required diagram: Diagram showing exchange rate determination and how a current account deficit leads to depreciation (or vice versa).
Higher LevelThis topic is assessed at HL.
Summary
This topic explains how exchange rates interact with the current account under different exchange rate regimes. It shows that in a freely floating system currency supply and demand link debits and credits between trading countries so the balance of payments tends to sum to zero, and it explains how depreciation, devaluation or managed intervention affect import and export values and thus the current account.