![]() ![]() ![]() goes into a recession, then GDP falls and they would import less from Mexico. If GDP grows, it will import more. Everything else held constant, these fluctuations also cause a shift in foreign exchange markets. For example, if the GDP falls in one nation, that nation is likely to import less. A variety of factors can influence these exchange rates, including the amounts of imports and exports, GDP, market expectations, and inflation. Similarly, wealthy individuals or businesses make investments in foreign countries for which they need foreign currency also.Įxchange rates are the prices of foreign currencies, which are determined in their respective foreign currency markets. ![]() For example, households buy imported goods for which they need foreign currency to pay for them. The foreign exchange market involves firms, households, and investors who purchase foreign goods, services and assets (or who sell goods, services and assets to foreigners). As a result, they demand (or supply) foreign currencies in order to complete their transactions. Define arbitrage and the importance of purchasing power parityĭemand and Supply Shifts in Foreign Exchange Markets.Explain the factors that cause the demand and supply of foreign currencies to shift.
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