Question

Short Answer Type Questions:
Give three sources each of demand and supply of foreign exchange.

Answer 1

Three sources of demand or outflow of foreign exchange are:

1)Imports: It requires foreign exchange because payments for imports are made in foreign exchange only.

2)Foreign Investment: Investment in rest of the world is an important business activity. We need foreign currency in which investment is to be made.

3)Direct purchase Abroad: Foreign exchange is needed to make direct purchases of goods and services from abroad.

Three sources of supply of foreign exchange are :

1) Exports: Exports of goods and services is an important source of supply of foreign exchange.

2)Grants and donations from rest of the world: A significant amount of foreign exchange flows from rich to poor countries by way of grants and donations.

3)Loans form rest of the world: It refers to the borrowings from rest of the world. It contributes to the supply of foreign exchange.