Conventionally, current account’s factors are thought to be the primary cause behind BOP imbalances – these include the exchange rate, the fiscal deficit, business competitiveness, and private behavior.
Alternatively, it is believed that the capital account is the major driver of imbalances where a global savings satiation created by the savers in surplus countries goes ahead of the present investment opportunities.
Reserve Assets
BOP defines the reserve asset as the currency or other standard value that is used for their foreign reserves. The reserve asset can either be gold or the US Dollar.
Global Reserves
According to IMF, between 2000 to mid-2009, official reserves increased from $1,900 billion to $6,800 billion. Global reserves were at the top, about $7,500 billion in mid-2008, then the reserves declined by about $430 billion during the financial crisis. From Feb 2009, global reserves increased again to reach $9,200 billion by the end of 2010.
BOP Crisis
A BOP crisis, or currency crisis, is the inability of a nation to pay for the necessary imports and/or return the pending debts. Such a crisis occurs with a very quick decline of the nation’s currency value. Crises are generally preceded by large capital inflows.
