Abstract
This chapter analyzes how international currencies are linked and how the rates for their exchange are determined. Suppose that you own a shoe store in the United States and are preparing to place an order for sandals from a manufacturer. The exchange rate is simply the price of one national currency (the peso, for example) in terms of another national currency (such as the U.S. dollar). Exchange rates enable consumers in one country to translate the prices of foreign goods into units of their own currency. The balance of payments account is a periodic report that summarizes the flow of economic transactions with foreigners. Balance of payments accounts are kept according to bookkeeping principles. Any transaction that supplies the nation's domestic currency (or creates a demand for foreign currency) in the foreign exchange market is recorded as a debit item in the balance of payments account. The balance of payments transactions can be grouped into three basic categories, namely current account, capital account, and official reserve account.
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