Balance of Payments, with a Focus on Nigeria

Abstract

As acknowledged in Bekaert and Hodrick (2012), to understand the concepts of foreign exchange markets, an understanding of the economic forces that cause exchange rate to fluctuate is required. Exchange rates respond to demand and supply to trade currencies. Demands and supplies to trade currencies arise from international trade flows and international capital flows. A lot of useful information about these international flows is provided by the balance of payments of countries. The balance of payments of countries record the payments between the residents of one country and the rest of the world over a given time period. It thus sheds light on the supply and demand for various currencies, the possible evolution of their exchange rates, and the health of the global financial marketplace in general (Bekaert and Hodrick, 2012).Balance of payments information are thus relevant to a slew of stakeholders. Stakeholders such as the press, economists and other academics, politicians, currency analysts, and currency traders, follow the trends in balance of trade information because they know that they influence the movements, either up or down, of exchange rates.In this essay, foreign exchange, international capital and trade flows, and the Balance of Payments of countries, are discussed. How balances on various subaccounts of the balance of payments, are linked to domestic and international saving and investment decisions; and the relationship between the Balance-of-Payments of a country and its GDP (which is an important indicator of a country’s financial and economic health); is discussed in the process.