The vegetable vendor hands over a bag of vegetables to you saying, `Rs. 20, sir'. You count the money and hand over the currency notes or coins to him and receive the bag. You are now poorer by the rupees paid and became the proud owner of the commodity. The vendor's cash increases by Rs. 20 and his stock diminishes in quantum by the same value. Evidently, it is a transaction in which an `exchange' is involved. But is it right to claim a similarity between this `exchange' and a `foreign exchange' transaction, applying this concept to a country as a whole in its trade with other countries? Let's see.
"No", say the economists. Though this concept is the very basis, the broader concept of international trade has a middle layer of `currency exchange' sandwiched in all the transactions between two countries. The transaction may be either import or export of commodities, products or services; or, for that matter, remittances for any purposes. Every such transaction involves the initial step of exchanging, say in the case of India, the Indian rupees for the currency of the `counter-party country' or for any other currency/currencies acceptable to that country. The concept of foreign exchange is, therefore, evidently based on the evolution of currency i.e., `money' in all the transactions with other countries. |
