The existence of national monetary units poses a problem in the settlement of international transactions. The exporter would like to get the payment in the currency of his country. For example, if America Exports, New York exports machinery to India Imports, Mumbai, the former would like to get the payment in US dollars. Payment in Indian Rupees (INR) will not serve their purpose because INR cannot be used as currency in USA.
On the other hand, the importers in India have their bank accounts in India in INR. A need, therefore, arises for conversion of the currency of the importer’s country into that of the exporter’s country.
Foreign exchange is the mechanism by which the currency of one country gets converted into the currency of another country.
We shall study about this article further, in detail, in our next post.