The approach argues that equilibrium exchange rates are achieved when the net inflow of foreign exchange arising from current account activities is equal to the net outflow of foreign exchange arising from financial account activities.

Balance of payment

Explanation:

Balance of Payments(BoP) is a record of a country’s transactions with the rest of the world. It is the statement of a country's transaction with the rest of the world over a given period of time. It is also known as balance of international payment.

The sum of all transactions recorded in the balance of payments must be equal to zero because credit in the current account has a corresponding debit in the capital account and vice versa.

The balance of payments include:

1. Current account

2. Capital account

1. Current account: This is the record of a country's transactions with the rest of the world. It includes net trade in goods and services, net earnings on cross-border investments, and net transfer payments.

2. Capital account: It is also known as financial account. This is the record of a country's imports and exports of capital and foreign aid. It records net changes in a country’s financial assets and liabilities.