Components of International Finances
International trade is impossible without foreign exchange markets. Exchange rate is the price of one currency in terms of another. Depreciation is the fact when one currency has become cheaper in terms of another currency. The other side of depreciation is appreciation – when one currency increase the value. When one currency depreciates another must appreciate.
Exchange rates change for the same reasons that any market price changes. Changes in the markets are taking place every minute of every day. Please where foreign currencies are bought and sold are called foreign exchange markets. One way to eliminate changes in currency value is to fix their value. The easiest way to do this is to define the worth of currency in terms of some standard. The most popular standard is gold.
Balance-of-payment deficit is an excess demand for foreign currency at current exchange rates. Balance-of-payment surplus is an excess demand for domestic currency at current exchange rates. For the purpose of narrowing exchange-rate movements government may also buy and sell foreign exchange.