Please explain the underlined lines???
How is purchase of own currency a credit and sale a debit???
My teacher says that when we purchase our own currency , there is outflow of foreign currency which is a debit and inflow of our currency which is a credit.
But in case of BoP dont we look at the transactions from the point of view of foreign currency and not that of domestic currency???
Dear student,
When there is inflow of foreign exchange it is recorded as a credit item in BOP. On the other hand, when there is outflow of foreign exchange it is recorded as debit item in BOP.
Official reserve transactions are those accommodating transactions carried out by the central bank that lead to change in the official reserves of the economy. In order to correct the disequilibrium in BOP sometimes the central bank carries out transactions in foreign exchange.Whenever there is rise in foreign exchange reserves it is recorded as a credit item in BOP. On the other hand, whenever there is fall in he exchange reserves it will be recorded as a debit item in the BOP.
Now, when there is purchase of own currency there would be a rise in the foreign exchange reserves. So, it will be recorded as a credit item. On the other hand, when there is sale of own currency in exchange there would be a fall in the foreign exchange reserves. So, it will be recorded as a debit item
When there is inflow of foreign exchange it is recorded as a credit item in BOP. On the other hand, when there is outflow of foreign exchange it is recorded as debit item in BOP.
Official reserve transactions are those accommodating transactions carried out by the central bank that lead to change in the official reserves of the economy. In order to correct the disequilibrium in BOP sometimes the central bank carries out transactions in foreign exchange.Whenever there is rise in foreign exchange reserves it is recorded as a credit item in BOP. On the other hand, whenever there is fall in he exchange reserves it will be recorded as a debit item in the BOP.
Now, when there is purchase of own currency there would be a rise in the foreign exchange reserves. So, it will be recorded as a credit item. On the other hand, when there is sale of own currency in exchange there would be a fall in the foreign exchange reserves. So, it will be recorded as a debit item