Question

Briefly explain the effect of the following on the Balance of Payment of a country.

Inflationary pressure in the economy

Answer 1

Increasing inflationary pressure increases the prices of its goods and services, therefore reducing the competitiveness of exports in international markets. The demand for the nation's exports decreases. The current account of the balance of payments may thus show a deficit. Rising domestic prices cause foreign products and services to become less expensive, which increases imports for the home nation and also causes a deficit in the current account of the balance of payments, therefore affecting the BOP.