Reasons for buying and selling foreign currencies: trade in goods and services

International Trade & Globalisation – Foreign Exchange Rates 🌍💱

Why do we buy and sell foreign currencies?

Imagine you’re a food‑truck owner in London who wants to sell your famous fish & chips in Berlin. To pay the German supplier, you need euros (€). That’s the first reason: trade in goods and services requires exchanging one currency for another.

Another reason is investment – a UK company might buy shares in a Japanese firm, so it needs yen (¥). Even tourists buying souvenirs abroad need to swap money. In short, any time you cross borders, you’ll likely need to trade currencies!

Trade in Goods and Services 🚚🛍️

When a country exports a product, the buyer pays in the exporter’s currency. For example:

• UK exports cars to Germany → German buyer pays in euros (€).
• Germany exports machinery to the USA → American buyer pays in dollars ($).

Because of this, exporters and importers must buy or sell foreign currencies to settle payments.

How Exchange Rates Work 💹

The exchange rate tells you how many units of one currency you get for one unit of another. It’s usually written as:

$E = \frac{\text{Foreign Currency}}{\text{Domestic Currency}}$

For example, if 1 USD = 0.85 EUR, then $E = 0.85$ euros per dollar. If you need 100 USD to buy a car, you’ll need $100 \times 0.85 = 85$ euros.

Factors that Influence Exchange Rates 🌡️📈

1. Interest Rates – higher rates attract foreign investors, boosting demand for that currency.
2. Economic Growth – strong GDP growth signals a healthy economy, strengthening its currency.
3. Political Stability – uncertainty can cause investors to flee, weakening the currency.
4. Trade Balance – if a country exports more than it imports, demand for its currency rises.

Practical Example: Buying a Car from Germany 🚗🇩🇪

1. Price of the car: 20 000 €.
2. Current exchange rate: 1 USD = 0.90 € (so 1 € = 1.11 USD).
3. Convert euros to dollars: $20\,000 \times 1.11 = 22\,200$ USD.
4. You pay 22 200 USD to the German dealer, who then receives 20 000 €.
5. Later, if the exchange rate changes to 1 USD = 0.85 €, you’ll need $20\,000 \times 1.18 = 23\,600$ USD for the same car.

Key Takeaways 📌

• Foreign exchange rates are essential for international trade.
• Buyers and sellers exchange currencies to settle payments.
• Exchange rates are influenced by interest rates, economic growth, political stability, and trade balances.
• Understanding how to convert currencies helps you estimate costs and profits in global business.

Quick Reference Table of Common Currency Pairs