Supply of foreign exchange
Topic: Balance of Payments and Exchange Rates · NCERT: Class 12, Ch 6 "Open Economy Macroeconomics"
Meaning
Supply of foreign exchange is the amount of foreign currency flowing into a country. It comes from exports, transfers from foreigners (such as remittances and gifts) and foreign purchases of domestic assets. When the rupee price of a dollar rises, Indian goods become cheaper for foreigners, so supply usually rises and the supply curve slopes upward. Class 12 adds a caveat: whether supply actually rises depends on the elasticities (how strongly buyers respond to price changes) of export and import demand.
Example
Suppose the rate moves from ₹50 to ₹60 per dollar. Indian textiles become cheaper for US buyers, so export orders rise and more dollars flow into India. Remittances from Indians working abroad also add to the supply of dollars.
Don't confuse with
- Demand for foreign exchange: this comes from imports, gifts sent abroad and purchases of foreign assets, and it falls as the exchange rate rises.
Related concepts
- Foreign exchange market
- Foreign exchange
- Foreign exchange rate
- Demand for foreign exchange
- Flexible exchange rate
- Currency depreciation
- Currency appreciation
- Currency speculation
- Interest rate differential
- Interest rate parity