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It is very often said that exports increase foreign exchange and imports reduce it.?
It is very often said that exports increase foreign exchange and imports reduce it.
But suppose for example:
If USA is exporting goods to India, and India pays in $, then India’s forex reserves will decrease, but since USA is anyhow receiving $ ( and not rupees) it forex reserves will not increase.
Also if India decides to pay in rupees, then USA’s forex reserves will increase, but India’s forex reserves will not decrease, since it is paying in rupees and not $.
Can anyone explain clearly the conflict between the first statement and the example given?
looks like i've really asked a bouncer!
3 Answers
- 1 decade agoFavourite answer
in international trade there is one agreed currency in which the trading partener trade. as you have mentioned the case of US &INDIA the $us is commanly and widly accepted currency world wide but not indian rupee..so in case the both countries decide to trade amoung themselves in whatever currency the importing country will loose some wealth.also whichever country issue currency it has to be backed by some assets .as the country issue more it looses its value.
- simplicitusLv 71 decade ago
The question makes sense, but the example, unfortunately, doesn't.
The U.S. has such a trade deficit that to all intents and purposes it has no reserves. So when dollars come in exchange for exports, U.S. reserves don't increase, the U.S. debt just decreases a bit.
The issue of "foreign exchange" reserves is a tricky one. The term "foreign exchange" refers to the fact that they come from international trade, not that they are held in the currency of the trading country.
http://en.wikipedia.org/wiki/Foreign_exchange_rese...
The bottom line is that it doesn't really matter which currency the actual trades are carried on in (it does matter which currency the price is in, but that's a different matter). With the foreign exchange markets the way they are, any country can hold its reserves in any currency it wants to. So the the real point is that exports increase reserves (or decrease debt) while imports decrease reserves (or increase debt) not whether the U.S. is holding rupees or francs.
But if a country does hold reserves, in what form does it or should it choose to hold them? At one point, the answer was gold - either real bars in their own vaults or the countries name on bars held in other vaults (Fort Knox, the U.S. repository, used to hold bars labeled with the names of many other countries)
Since the primary concern is that the reserves not lose value, reserves tend to be held in "strong" and "stable" currencies. This used to be the British pound; then it became the American dollar; and while the dollar is still dominant, more and more countries are including Euros in their reserves.
- Anonymous5 years ago
forex cost is kinda an identical element because of the fact the ratio of two forex. frequently the forex are paired with USD. the person-friendly pair is eu/USD and GBP/USD. If the cost for eu/USD is a million.fifty seven, it relatively is propose a million USD is comparable to a million.fifty seven Euro.
