The Foreign Exchange Market
When studying open Economics that trade with one another, there is a major difference in the transactions between domestic and foreign residents as compared to those between residents of the same country, namely, that differing national currencies are usually involved. A US importer will generally have to pay a Japanese exporter in yen, a German exporter in deutschmarks and a British exporter in pounds. For this reason, the US importer will have to buy these currencies with dollars in what is known as the foreign exchange market. The foreign exchange market is not a single physical place, rather it is defined as a market where the various national currencies are bought and sold. Exactly what factors determine how much domestic currency has to be given in exchange to obtain a unit of foreign currency, the behaviour of exchange rates and the impact of exchange-rate changes, are one of the major fields of study in international economics and form the subject matter of later chapters of this book.
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