When transportation costs are low and government don’t restrict international transactions companies are looking for opportunity to sell goods on foreign market. Nations trade with one another because they expect to benefit from the transaction. Trade enables them to exchange things they don’t need for the things they do need.
International markets for commodities
Commodities that are produced by foreign economy are called imports. Commodities that are produced by domestic economy and consumed by foreign economy are called exports. If the price of commodity in the foreign market is lower than in domestic market there will be on incentive to import it.
The difference between the value of exports and imports is the foreign trade balance. If the value of imports exceeds the value of exports then trade balance is deficit.
International markets for currencies
International trade is impossible without foreign exchange markets. Exchange rate is the price of one currency in terms of another. Foreign companies want to be paid in money useful in their economy. Conversely domestic companies who want to export want be paid with the money useful in domestic economy. When money that are used in international transactions are different from that used in the domestic economy the person who receives payment will usually want to exchange it.
International trade creates market for different kinds of money. Changes in the markets change the exchange rate. Exchange rates change for the same reasons that any market price changes. Changes in the markets are taking place every minute of every day. Place where foreign currencies are bought and sold are called foreign exchange markets.