Chapter 19 notes - III. Financing International Trade A....

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Financing International Trade A. Foreign exchange markets (or currency markets) enable international transactions to take place by providing markets for the exchange of national currencies. B. An American export transaction is explained below. 1. U.S. firm is selling $300,000 worth of computers to British firm. 2. Imagine the exchange rate is $2 = 1 Br. pound, so the British firm must pay 150,000 pounds. 3. The British firm will draw a check on its deposit at a London bank for 150,000 pounds, and will send it to the U.S. exporter. 4. The exporter sells the British check to an American bank for $300,000 in exchange for the British check, and the exporter’s account is credited. 5. The American bank will deposit the 150,000 pounds in a correspondent London bank for future sale. 6. Note the major points here. a. Exports create a demand for dollars and a supply of foreign money, in this case British pounds. b. The financing of an American export reduces the supply of money (demand deposits) in Britain and increases it in the U.S. C. An American import transaction example illustrates how a British exporter is paid in pounds while the importer pays dollars. 1.
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Chapter 19 notes - III. Financing International Trade A....

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