ABSTRACT
The price of a country’s currency depends on the quantity supplied relative to the quantity demanded, at least when exchange rates are determined in a free, unregulated market.1 It follows that if we know the factors influencing the supply of and demand for a currency, we also know what factors influence exchange rates.Any factor increasing the demand for the currency will, ceteris paribus, increase the foreign exchange value of the currency; that is, cause the currency to appreciate. Similarly, any factor increasing the supply of the currency will, ceteris paribus, reduce its foreign exchange value; that is, cause the currency to depreciate.2 Clearly, then, there is considerable interest in maintaining a record of the factors affecting the supply of and demand for a country’s currency.That record is maintained in the
balance-of-payments account. Indeed, we can think of the balance-of-payments account as an itemization of the reasons for demand for and supply of a currency.
