Foreign Balance

Foreign Balance

Foreign Balance, another name for the balance between payments to people in other countries and receipts from them. The balance may be described as active or passive (surplus or deficit). Apart from its effect upon the gold or other reserves, an active or passive balance affects the domestic economy.

An active balance tends to have the same effect as an increase in domestic investment (e.g. house or road construction): i.e. it increases demand, employment, incomes and prices, and in turn imports, and so tends to restore equilibrium to the foreign balance. A passive balance tends to reduce employment, incomes and prices, and cuts demand for goods generally, including imports, thus releasing goods for export and tending to restore equilibrium to the foreign balance.

Foreign Exchange, the currency of other countries. It is required by individuals and institutions to buy goods and services from and to make gifts or loans to people in other countries. At the same time they will be buying our currency to pay for their purchases here. The two-way nature of these transactions means that as long as relative prices are 'right', most of our demands for other countries' currencies will be matched by their demands for our currency, leaving only small differences to be financed by movements of gold or foreign exchange reserves.

Most countries tend to hold as reserves only convertible foreign exchange because it will be readily accepted by almost all countries in payment for goods or services; inconvertible currency may be acceptable only to the country that issued it.

Foreign exchange is required in trade because there is no single currency that is accepted by all countries, although many countries use sterling and some dollars.

Foreign Exchange Market. (a) Strictly a financial centre in which foreign exchange (foreign currency) is bought and sold. In Britain the members are the exchange dealers of banks and financial houses, plus several recognized firms of exchange brokers. When Governments control the exchanges, business may be done usually only through recognized dealers. (/4 More generally the complex of dealings in foreign currencies which determine the day-to-day prices of currencies in terms of one another.

What next? Socio Economic - Socio Economic Groups


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