explain " change in foreign exchange reserves with central bank" in the context of balance of payments. (4 marks) ..... i want to know why a decrease in reserves is put into inflow side ( credit side)???

In response to first part of your query, foreign exchange reserves can change with the central bank due to
1) Export and Import of Goods
2) Export and Import of Services
3) Unilateral Transfers
4) Foreign Direct Investment (FDI) and Portfolio Investment
5) Loans and Borrowings
6) Banking Capital Transactions
For explanation, follow the below mentioned path.
Chapter-6 (named as 'Open Economy Macroeconomics')- Lesson-1 (named as 'Introduction to Open Economy and Introduction to Balance of Payment​')-under the topic 'Components of Current Account')

In response to second part of your query, decrease in 'reserves' implies purchase of foreign exchange, their sale causes the flow of foreign exchange into the country. Thus, decrease in official reserves are shown as positive items ​in the BOP accounts.

  • 0
What are you looking for?