discrepancies, accounting conventions, and exchange rate movements thatchange the recorded value of transactions, the balance is typically a deficit or surplus.Some of the factors that can affect the Balance of Payments occur when, for example, theUnited States buys more goods and services than it sells, and must finance the differenceby borrowing, or selling more capital assets than it buys. Any transaction that causes money to flow in or out of a country is included in theBalance of Payments. Because the exchange rate is determined by the supply anddemand of a countrys currency, it is directly related to the Balance of Payments. To help clarify the format for which the Balance of payments is determined, the 1993U.S. Balance of Payments statement is included on the next page. III. EXCHANGE RATE SYSTEMSFixed Exchange RateIn 1944, a group of representatives from throughout major industrialized countries, metin Bretton Woods, New Hampshire and established the fixed rate exchange system,known as the Bretton Woods Account. This system was developed as an entirely newinternational financial system as an attempt to curb fluctuations in currency values. Theexchange rates were fixed using the U.S. dollar as the official reserve currency, and acountrys central bank had to buy or sell supplies of its currency using dollars, in theevent that the exchange rate strayed from the pre-determined rate. 3Floating Exchange RateThe Bretton Woods fixed exchange system stayed in effect until the early 1970s, when itcollapsed and was replaced with the floating exchange rate. This system did not imposea pre-determined exchange rate. Instead, the exchange rate is allowed to change andfluctuate as individuals, businesses, banks, and governments buy and sell the currenciesof other countries. This creates a rate that is constantly changing - not only by the day orby the hour, but by the minute. Dirty Floating Exchange RateThe floating exchange rate ca...
