CBSE Class 12 Ecomonics - BOP and Foreign Exchange Rate

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CBSE Class 12 Ecomonics - BOP and Foreign Exchange Rate. Learning the important concepts is very important for every student to get better marks in examinations. The concepts should be clear which will help in faster learning. The attached concepts made as per NCERT and CBSE pattern will help the student to understand the chapter and score better marks in the examinations.  


Foreign Exchange refers to all currencies other than the domestic currency of a given country. 

Foreign exchange rate is the rate at which currency of one country can be exchanged for currency of another country. 

Foreign Exchange Market: The Foreign Exchange market is the market where the national currencies are traded for one another. 

Functions of Foreign Exchange Market: 

1. Transfer function: It transfers the purchasing power between countries. 

2. Credit function: It provides credit channels for foreign trade 

3. Hedging function: It protects against foreign exchange risks. 

FIXED EXCHANGE RATE SYSTEM: Fixed exchange rate is the rate which is officially fixed by the government, monetary authority and not determined by market forces. 

FLEXIBLE EXCHANGE RATE: Flexible exchange rate is the rate which is determined by forces of supply and demand in the foreign exchange market. 


Demand for foreign exchange:

 1. To purchase goods and services from other countries 

2. To send gifts abroad 

3. To purchase financial assets (shares and bonds) 

4. To speculate on the value of foreign currencies 

5. To undertake foreign tours 

6. To invest directly in shops, factories, buildings 

7. To make payments of international trade. 

Supply of foreign exchange: 

Foreign currencies flow into the domestic economy due to the following reason. 

1. When foreigners purchase home countries goods and services through exports 

2. When foreigners invest in bonds and equity shares of the home country. 

3. Foreign currencies flow into the economy due to currency dealers and speculators. 

4. When foreign tourists come to India 

5. When Indian workers working abroad send their saving to families in India. 


The equilibrium exchange rate is determined at a point where demand for and supply of foreign exchange are equal. Graphically interaction of demand and supply curve determines the equilibrium exchange rate of foreign currency.class_12_Economic_concept_83  

Managed Floating: This is the combination of fixed and flexible exchange rate. Under this, country manipulates the exchange rate to adjust the deficit in the B.O.P by following certain guidelines issued by I.M.F. 

Dirty floating: If the countries manipulate the exchange rate without following the guidelines issued by the I.M.F is called as dirty floating. 


Meaning: The balance of payments of a country is a systematic record of all economic transactions between residents of a country and residents of foreign countries during a given period of time. 


Balance of trade: Balance of trade is the difference between the money value of exports and imports of material goods (visible item) 

Balance of payments: Balance of payments is a systematic record of all economic transactions between residents of a country and the residents of foreign countries during a given period of time. It includes both visible and invisible items. Hence the balance of payments represents a better picture of a country’s economic transactions with the rest of the world than the balance of trade. 


A balance of payments statement is a summary of a Nation’s total economic transaction undertaken on international account. There are two types of account. 

1. Current Account: It records the following 03 items. 

a) Visible items of trade: The balance of exports and imports of goods is called the balance of visible trade. 

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