IBDP Economics Chapter 14 Notes

exchange rates and the balance of payments


These notes have specially been curated by expert teachers to simplify and enlighten concepts given in IB Exchange rates and the Balance of Payments HL. The notes are comprehensive in nature and are sufficient to study the chapter in depth and one need not look for other resources beyond the notes provided on our website which can be accessed for free. The notes for Exchange rates and the Balance of Payments IBDP HL are available on our official website and can be downloaded for free. The material made available on Tychr’s website is available for all IBDP subjects and is specially curated after an extensive amount of effort to ensure that the notes are in consonance with the IB curriculum and are an amalgamation from various textbooks prescribed by the IBO.

In this chapter International exchange rates are discussed which are caused due to constant flow of money in and out of countries because ofInternational transactions. The demand and supply for the foreign currencies are depicted in the form of graphs in the chapter in a freely floating exchange rate system the market determines the exchange rate. The chapter also discusses the changes in exchange rates and the causes for the same. The exchange rates are evaluated through inflation, employment, economic growth, current account balance and foreign debt. The government intervenes so that a fixed exchange rate is maintained through official Reserves, interest rates, borrowings from abroad, efforts to limit imports and exchange controls.

The chapter also discusses managed exchange rates which is a combination of both floating and fixed exchange rate systems, the consequences for which are overvalued currency and undervalued currency. The students will also have to learn calculating the value of currency in terms of another and % changes in the value of currency through the formulae given in the chapter along with graphical representation of linear functions. Next we look at the Balance of payments which is the record of all transactions between the residents of a country and the residence of other countries. The chapter introduces terms like credit debits, deficit, surplus, current account, capital account, financial account and imbalance. The concepts of balancing surpluses through fixed and managed exchange rates are also discussed in the chapter. Lastly, the Marshall lerner condition and the j curve are discussed in detail to understand the above-mentioned concept clearly.