Say country A sends some billions of dollars to country B in aid or in exchange for some resource. How does the actual transfer take place? How does the wealth of country A decrease and the wealth of country B increase?
In: 472
tl;dr: is that it is basically a line of credit for buying imports. Thus, the account that is transfered can be used to buy imports without using country B’s local currency, and importing without having to pay via exports will increase a country’s wealth.
Trade basically has to work this way, because actually transferring the currency to cover trading levels would be insane. Back in the ol’ days, there was the gold standard, which basically meant that countries traded and if one side ran up a balance too high, they would have to physically send gold to cover the amount. Since we have moved away from the gold standard that doesn’t really happen anymore. Nowadays you effectively stop being able to import goods (the value of the local currency on import markets goes down to 0, so you can no longer afford to import).
If I want Good A for my country, who I need to pay for in $, but I only have £. I need to go export something that people want so they will buy my £ for $ so they can buy the item I am exporting, and those $ I can then use to buy what I want to import.
If someone hands me $, then I can buy my imports with $ without having to sell goods to generate $.
Or: I’m having a Crisis! My little nation is out of money and I can’t pay my police, everything is going to go down the drain!
An angel has come and provided an account in a NY Bank with 10M$ in it. Woo!
But Wait! I can’t pay my police with those $, they are paid in £. The bank doesn’t have a branch in my capital, so what is the value if having money half the world away? It is still hopeless right?
Except I can go hire someone in NY with that money to fill a tanker full of gas and drive it across the world to my military base. Now the money I would have had to spend on gas is freed up and I can use it to do all the other things I need to do. Saved at last!
Note that this is **very different** from a currency crisis. In the case there is a lack of physical currency in a country (such as what might happen if the local currency gets so devalued the country swaps to using an external currency), it means there is literally not enough physical dollars to go around, even if there is the value on paper. In that case, you do need to physically move in actual cash.
Latest Answers