Posted by Anjali Kaur on Nov 04, 2020
What is the Foreign exchange?

What is the foreign exchange?

Foreign exchange refers to all currencies other than the domestic currency of a given country. For example, in India, USD will be a foreign exchange similarly the Canadian dollar will be, and all the other currencies except INR.

 Let’s understand this topic in detail.

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What is foreign exchange rate?

Foreign exchange is a rate at which the currency of 1 country can be exchanged for the currency of the other country. For example, INR 70 = 1 USD. It implies that in order to buy 1 USD, Indians need to spend INR 70.

What is foreign exchange market?

The foreign exchange market is a market where international currencies are traded for 1 another.

Types of foreign exchange rate system

  1. Fixed exchange rate system.
  2. Flexible exchange rate system.
  3. Managed floating exchange rate system.

1. Fixed exchange rate system

The fixed exchange rate is that rate which is not determined by the forces of the demand and supply in the market. It is fixed or declared officially by the government of the country concerned.

2. Flexible exchange rate system

Flexible exchange rate systems or free-market exchange rate systems are the same. It is that the exchange rate that is determined by the demand for and supply of different currency in the foreign exchange rate market.

3. Managed floating exchange rate system

This is a combination of both fixed and flexible exchange rates under this government intervention to keep the exchange rate within desired limits and the rate is determined by the forces of demand and supply in the international money market.

Now, let’s see how the demand for and supply of foreign exchange.

Demand for foreign exchange

  1. To purchase goods and services from other countries, that is imports.
  2. To purchase financial assets and shares and bonds of other countries.
  3. To speculate on the value of foreign currency.
  4. To undertake foreign tours.
  5. To invest directly in shops, factories, buildings.
  6. To make payments of international trade.

Supply of foreign exchange

  1. When foreigners purchase home country goods and services through exports.
  2. When foreigners invest in bonds and shares of the home countries, thereby, causing an increase in foreign direct investment.
  3. Foreign currency is also supplied in the economy by the currency dealers.
  4. When a foreign tourist comes to India.
  5. When Indian workers working abroad send their savings to their families.

Thank You for reading.

You can read the related post on macroeconomics:

The Budget Expenditure

The Budget Deficit

The Government Budget

Working of the Investment

Investment Multiplier

Types of Employment Equilibrium

Concept of Short-Term Equilibrium

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