Final answer:
International trade requires a system for exchanging currency among nations to facilitate transactions. The exchange rate, determined by supply and demand, affects how much currency is paid for a good.
Step-by-step explanation:
In international trade, a system for exchanging currency among nations is required to facilitate transactions between countries with different currencies. The exchange rate, which represents the price of one currency in terms of another currency, determines how much currency will be paid for a good. The exchange rate is influenced by factors such as supply and demand for currencies, interest rates, economic indicators, and central bank policies.
For example, if a country has a strong economy with high demand for its currency, its currency will appreciate in value relative to other currencies. This means that when importing goods from that country, a higher amount of the importing country's currency will be required to purchase the same amount of goods. On the other hand, if a country has a weak economy or low demand for its currency, its currency will depreciate, requiring a lower amount of the importing country's currency to purchase the same amount of goods.
The foreign exchange market is where currencies are traded, and it operates based on supply and demand. The market participants, including banks, corporations, investors, and governments, determine the exchange rates through their buying and selling activities. The central bank of a country can also intervene in the foreign exchange market to influence the exchange rate through its monetary policy measures.