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  1. Introduction
  2. Balance of payment
  3. Current account
  4. Capital Account
  5. Exchange rate determination
  6. International Capital Flows
  7. Conclusion

International trade involves exchange of goods and services across the international borders. It allows for competition of goods and services in the market resulting to more affordable goods to the consumers. Through international trade goods and services are made available in the international markets which could not be available without it. Through international trade supply and demand are affected at a global scale leading to world economy. International trade makes goods that are not locally available to a country to be imported and traded in that country (Fischer, 2004).

Global trade increases efficiency in that it allows countries that are developed to use their resource or technology to produce more and therefore sell at a cheaper cost. International trade allows countries to take part in the world economy encouraging foreign direct investment. This increases the growth of economy because of the competition between different countries.

[...] The supply depends on demand in forex rather than the exchange rate. The supply is always constant so that the graph for it is always vertical as increase in supply of currency for one country leads to decrease in its value in relation to others. The supply and demand in foreign exchange depends on economics factors, political conditions, and market psychology. Economic policies that have been made by the government and the central bank affects the supply and demand in foreign exchange in that they may either be favorable thereby increase demand. [...]

[...] This ratio in turn affects the value of the currency of a country. When revenues from a country's export is much higher than the price of imported goods then more of the country's currency is bought as a result of need for their goods. This increased demand in currency in turn increases the value of the currency (National Bank of Georgia (Tbilisi), 2006). The political stability affects the value of currency in that for countries which are likely to have turmoil the investors are forced to move their investments to a more stable country. [...]

[...] International capital flow is comprised of capital account and current account. Current account includes receipt from traded goods, income and transfers while capital account is comprised of the whole financial flow. When a country imports more than what it exports, foreign trading partners can continue to hold their currency or use that money to invest in that country, thereby adding to the country's capital flow (National Bank of Georgia (Tbilisi), 2006). Capital flows always go in the opposite direction to the goods being bought in the process. [...]

[...] The latter can be made in order to enhance the country to export more thereby building its currency. Current account can be determined through evaluating the balance of trade in goods and services and the net income from investment in overseas and also the net transfer. Profits, dividends and interest payments make up net investment income. Transfers may include aids transfer to other countries. Current account This involves flowing of goods and services into and out of a country, which comprises of interests earned which can either be private or public. [...]

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