Study Reviewer:

Topic 1: International Transactions

Activity 1: Why do nations transact with other nations?

International Transactions:

In our interconnected world, nations engage in transactions with each other for various reasons,
shaping the global economy in profound ways. Here’s an exploration and explanation of why
nations transact with each other:

1. Global Interconnectedness: Today, events in one part of the world can have
far-reaching effects on other countries. Nations engage in transactions to capitalize on
opportunities presented by the global market and to mitigate risks associated with dependency
on domestic markets alone.
2. Trade of Goods and Services: International transactions involve the exchange of
goods and services across borders. This includes a diverse range of products such as American
computers, German cars, Japanese DVDs, French wines, and Italian clothes. Nations trade to
access goods and services that may not be available domestically or to benefit from
comparative advantages in production.
3. Monetary Systems and Foreign Exchange: Differences in monetary systems
necessitate mechanisms for converting domestic currency into foreign currency and vice versa.
The foreign exchange market facilitates these transactions, enabling individuals, businesses,
and governments to engage in international trade and investment seamlessly.

Balance of Payments:

The balance of payments serves as a comprehensive summary of all transactions between a

country and the rest of the world within a specified period. It provides insights into the demand
and supply of foreign exchange and is crucial for understanding a country’s economic health.
The balance of payments consists of two main components:

1. Current Account: This records transactions involving goods, services, transfers,

and investment income. It reflects a country’s trade balance, including exports and imports of
goods and services, as well as transfers such as remittances and foreign aid.
2. Capital Account: This accounts for transactions involving short-term and
long-term assets, including investments and borrowing. It encompasses trade credit, lending by
banks, and the purchase and sale of securities like stocks and bonds.

Balance of Payments Disequilibrium:

Balance of payments deficits or surpluses indicate economic imbalances within a country. These
imbalances stem from autonomous transactions, which are influenced by factors outside the
balance of payments statement, such as international competitiveness, political considerations,
and expectations about returns on investments.

To address imbalances, countries engage in accommodating transactions to finance payment

disparities arising from autonomous transactions. These transactions highlight the dynamic
nature of international trade and the interconnectedness of economies on a global scale.

Foreign Exchange Market:

The foreign exchange market facilitates the trading of currencies, enabling individuals and
institutions to exchange one currency for another. It is the largest and most liquid market
globally, with trillions of dollars traded daily. Unlike traditional markets, the forex market operates
24/7 and lacks centralized oversight, offering unparalleled liquidity and accessibility to traders
worldwide.

In summary, nations engage in transactions with each other to access goods and services,
navigate differences in monetary systems, and capitalize on opportunities presented by the
global economy. The balance of payments provides insights into these transactions, highlighting
economic imbalances and the role of accommodating transactions in maintaining equilibrium.
The foreign exchange market serves as a vital infrastructure for currency exchange, facilitating
international trade and investment on a massive scale.