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Economics/Foreign Exchange Money Purchase Power.


Foreign Exchange
Foreign Exchange  
QUESTION: Dear Eklimur

1. Can a Individual in his country buy Foreign Exchange Money without any limits for Business, Trade ?. i.e. Any Amount of Foreign Exchange money.
2. Do the Government of each country has different laws for foreign exchange money purchase power limits ?.

In case the answer is either yes or no for 2, what are the
reasons ?

Some Examples,

US National wants to purchase Australian Dollars, Euros, Great Britain Pounds, Indian rupees etc.
British National wants to purchase US Dollars, Euros, Japanese Yen etc
Indian National wants to purchase US Dollars, Euros, Great Britain Pounds, Japanese Yen etc

Awaiting your reply,

Thanks & Regards,
Prashant S Akerkar

ANSWER: Dear Prashant,

Thank you for soliciting my opinion in respect of your query about foreign exchange buying ability of an individual or a business in any particular country. The answer to this question is in the negative with some qualifications.

No individual in any country can buy foreign exchange without limit. And that applies to both business and trade. Since different countries have different patterns of foreign currency supply and demand and exchange rates, the limits vary widely. Some individual in some country may be able to buy a large sum of foreign currency without prior approval, such as in Canada and in the U.S., but for buying a very large sum for business or trade, he would certainly need prior approval, and indeed approval in business and trade.

In some countries, this is even more severely limited, such as in India or in Pakistan. These countries are controlled by different economic paradigms and different political systems which take care more of the economy than the so-called rights of the citizens that may interfere with the economic systems. This is in contrast with countries like Canada, the U.S., or Germany. Because these countries have to accord certain rights to its citizens irrespective of the economic health of the country [see the case of gun control in the U.S.], these countries allow greater latitude to its individuals and its businesses in respect of foreign exchange buying and selling. Yet they also impose limit.

The reasons why buying of foreign exchange cannot be permitted without limit are succinctly enumerated below:

1.   In today’s globalization, the economic health of a country depends to a great extent on international trade. The theory of international trade tells us each country in trade benefits, even if one country produces a thing at more cost than the country where it can export only if it has comparative advantage. There may as well be absolute advantage. Yet the exporting country might face tremendous problem if its currency appreciates. This is because importing countries find it difficult to buy its products, and its imports increase. The same goes for all other countries. These countries thus get enmeshed in an intricate inter-country matrix of relative foreign exchange prices. No country wants that this balance should go out of whack.

2.   The foreign exchange rate is determined by demand for and supply of currencies of different countries. The demand for and supply of currencies, in turn, depend on the demand for and supply of goods and services as well as on purchase and sales of assets across countries. These activities cannot go on freakishly by individual choices made unilaterally to the detriment of the economy. Therefore the government has to come to the fore.

3.   Even though very large sums may be allowed to individual traders or businessmen, unlimited amount is never allowed to even a U.S. or Canadian citizen. If you travel from North America to India –e.g., from Toronto or New York to Mumbai or Delhi –you may be allowed to carry about $10,000, but if you are travelling from Mumbai or Delhi, you will not at all be allowed to carry so many lakhs of rupees (of $10,000 equivalent). Certainly, you will not be allowed to carry any sum if you are travelling from Delhi to Calcutta, but you can carry even larger U.S. dollars if you are travelling from, say, Toronto to Montreal or from New York to California. For business you may be allowed to buy in hundreds of thousands with prior permission. But limit stands.

4.   Yes, British nationals can buy U.S. dollars or Japanese yen, some amount without needing any permission, but permission is required if that amount turns to millions, and definitely not without limit. Similarly for the Australian or French citizens. The case is rather very restricted for an Indian or a Burmese citizen. The reasons are due to what have been explained in (1) and (2) above.

5.   Every country maintains a foreign exchange reserves. There is the question of availability of foreign funds. This also limits the capacity of the country to the amount it can allow all its individuals and businessmen to purchase foreign exchange. Therefore, an individual can buy foreign exchange up to the limit that will be decided by the government of the country in conjunction with the central banks (such as the Fed of the U.S. or the Reserve Bank of India). The limit is in fact already imposed when permits for business was accorded to the business.

6.   Yes, there are different laws in different countries as to the imposition of limit on individuals and businesses in allowance of the limit of foreign exchange purchase –the Indian system is guided by the federal parliamentary system, with provincial systems only indirectly influencing the outcomes; the all-powerful parliamentary system and the ruling party in Bangladesh has all the power, and that can vary from individual to individual, quite unlike that of India, where democracy is much stronger;  the rules are far too stringent in the case of Pakistan; in the case of the U.S., the Congress will have to depend on both the parties, and Obama and Manmohan are more or less on the same page.

7.   Last but not the least, the Swiss Bank allows unlimited purchase of foreign exchange, but then this is an exception than the rule.

I hope, Prashant, I have been able to make myself clear and put my ideas across to you. If my answer serves your purpose, I will feel pleased. I am sorry that I wasn't able to write to you earlier because of an extra teaching assignment. My best wishes to you.  

---------- FOLLOW-UP ----------

QUESTION: Dear Prof Eklimur Raza

Thank you.

As you mentioned, there are different laws in every country for imposing restrictions on foreign exchange purchase limits.

Does imposing restrictions on foreign exchange purchase affect the economy
of the country ?.

On a personal note, are you for or against imposing restrictions on foreign exchange purchase power limits ?

Awaiting your reply,

Thanks & Regards,
Prashant S Akerkar

ANSWER: Dear Prashant,

Yes, imposing restrictions on foreign-exchange purchase affect the economy of the country in the following ways:

First, when there are restrictions, individuals and businesses cannot buy as much of foreign exchange as they want to. This limits their ability to transfer money outside the country.
This is especially so for the poorer countries like India, Pakistan, or Bangladesh. There is a tendency among people in those countries to siphon off money to other countries like the U.S., the U.K., or Australia. More so the case when they make money illegally. These people include even corrupt leaders of countries like Pakistan and Bangladesh, a little less in India. You must have heard of prime ministers of Bangladesh siphoning off hundreds of billions of takas (Bangladesh currency) out of Bangladesh. When the rulers themselves do this, there is cancer in the terminal stage, and we can hardly expect anything good of such a country.

Supposing there is a poor country with the top leaders not so much corrupt and want to make the country remain economically stable or prosper. In that case, draining of wealth from the country would be effectually stemmed to a great extent.

Second, when restriction is imposed, filthy rich people such as those in India won’t go like the Middle East people to the U.S. or elsewhere and waste valuable national wealth on unbridled pleasures. You may have heard of a wealthy Indian guy wearing a shirt of gold, costing crores of rupees (nearly a million dollars), just to show off in a country where many people don’t have two times of square meals. My point to refer to this is that, such an act doesn’t affect the economy anyway, but if people like him go on showing off in other countries, like Middle East emirs, that would be too big a drain on the economy. So, while wearing a gold shirt doesn’t affect the economy, splurging Indian currency in dollars on spas, escorts and $9,000 rooms in expensive hotels in New York should hardly be an option for a developing country.

Now the question is, why? Say, some people in week buy one million dollars with fifty million rupees, they spend that $1m abroad. This money goes out of government coffers, which simply replaces the dollars that had been bought by the RBI in the first place, and the amount of Indian currency had already been in the hands of the foreigners. Now the foreigners will use this sum to buy Indian goods, but in return India doesn’t get anything since that sum has already been spent abroad. Now, without restriction, such activities would run into billions and billions. You can well imagine the bad side to the economy.

Third, by imposing restrictions, the government supports domestic industries to a very great extent. Not that the government will prohibit purchase, but that the government will limit purchase of foreign exchange. Importing sleek BMWs and Ferraris or even Toyotas to replace unimpressive Ambassadors, Hummers for Mahindras, can be controlled only by foreign-exchange restrictions.

Fourth, restrictions will limit import of drugs which has far-reaching baneful impact on the society. One can just go out with a bagful of Indian currency to South America and return with hidden bags of drugs or boosting medicines. If he is caught, the money is gone; if he is not caught, this has even worse impact. This is just one example. Examples can be multiplied.

Fifth, restrictions have to be judicious. Clamping complete ban would give rise to black market. There was a time nothing could be imported into India, and no purchase of foreign exchange by an individual was permissible. Now the government knows better. On the other hand, completely unleashing the tether of foreign-exchange purchase would have a pernicious impact. The government, considering the existing economic scenario, must decide what to do. While an Indian would be driving his gawky Ambassador along the Orley Drive, a Pakistani would drive a sleek Toyota along McLeod Road in Karachi. But it was because of this that India has progressed that much, and now the Mumbai tycoon can boast of a Lamborghini. Things are different here in Canada or the U.S. They can afford so much, and they go on a binge. Yet, beyond certain limit, there is restriction: I may convert a couple of thousand dollars sitting behind my computers, but for a couple of millions I need to go to Bank of Canada.

Sixth, as in economics, demand for and supply of foreign exchange play a vital role for the government to decide on the level of restrictions. Buying foreign exchange presupposes the demand for foreign currency, and excess demand bids up prices relative to domestic currency. So, one effect of imposing restriction on foreign-exchange purchase is prevention of value of domestic currency from impending tumble in value.

ON A PERSONAL NOTE, well, I am neither for complete freedom of FE purchase nor against out-and-out restrictions on FE purchase. Both these extremes –the former being worse than the latter –will mire the economy in financial tsunami. I am for judicious restrictions: some amount of caffeine is good to keep a drowsy guy awake, because caffeine blocks adenosine and allows dopamine to play its role, but elevated levels of dopamine may show up in schizophrenia; quite the same, the requisite amount of restriction on FE purchase is necessary to overall economic health but excessive restriction or no restriction will throw the economy out of kilter.   

---------- FOLLOW-UP ----------

QUESTION: Dear Prof Eklimur

Thank you.

A Final question from my end.

Suppose the US Government removes regulations on foreign money purchase power limits. i.e. US Citizens can purchase any foreign money viz GBP, Australian Dollars, Euros, Yen, Indian rupees etc without any limits, will it affect the Local Stock Exchanges viz Nasdaq, NYSE ? i.e.
Stock Market (securities).

Will the Sensex value on Nasdaq , NYSE increase or decrease at the end of day trading ?

Similarly the Indian Government removes regulations on foreign money purchase power limits. i.e. Indian Citizens can purchase any foreign money USD, GBP, Australian Dollars, Euros, Yen etc without any limits, will it affect the Local Stock Exchanges viz National Stock Exchange, Bombay Stock Exchange ? i.e. Stock Market (securities).

and so on for every local stock exchanges for each country if the respective
government removes the foreign money purchase power limits ...

Also will there will be any impact on Currency exchange rate between US Dollars and Indian Rupees ?

Today 1 US DOLLAR ($) =  Rs 53.78

Awaiting your reply,

Thanks & Regards,
Prashant S Akerkar

Dear Prashant,

Let me put up the caveat at the outset that the imaginary situation against which we are going to delve into the hypothetical financial market on a global landscape as broached by you is simply a theoretical framework. To be sure, this major premise or the assumed theoretical framework that we take up as the background of our analysis is certainly not analytically irrational against a perfect “globalized economy.” However, as national economies are never perfect, a perfect globalized economy is simply an idealized situation, not a real-life situation.

Nonetheless, we use this non-real, idealized situation as our first point of departure in formulating the logical parts in a bid to arrive at a logically sound, even if pragmatically nonexistent, answer to your query. Take it something like the physicists use a “fictitious, phoney force” called centrifugal force which actually does not exist –but they nevertheless use that nonexistent centrifugal force to explain the “real force” called the centripetal force. We also use our “idealized, non-real, fictitious, phoney global situation”–but we nevertheless use that idealized, non-real situation to explain a situation which could be the “real global situation” were globalization perfect on a pragmatic plane.

This theoretical framework, of necessity, serves as our major premise in the syllogism which gives the answer to your query. This “major premise” is:

All the countries in the world abolish all the restrictions on foreign exchange purchase and sales. This is exactly a reformulation in a logical format of what you have based your question on.

Our major premise affords us to assume that there are N number of countries in the world: 1, 2, 3, ..., N. Each of the N countries trades as well as exchanges currencies with each other of the N countries. So Country 1 trades and exchanges currencies with N countries: this forms an N vector as 11, 12, 13, ..., 1N. Similarly, Country 2 trades and exchanges currencies with N countries: this forms an N vector as 21, 22, 23, ..., 2N. For Country 3, the N vector is 31, 32, 33, ..., 3N. And so on for the Nth country, which is N1, N2, N3, ..., NN. Therefore, we end up with an NxN matrix, with N vectors for N countries.

11, 12, 13, ..., 1N
21, 22, 23, ..., 2N
31, 32, 33, ..., 3N
... ...   ...   ...
N1, N2, N3, ..., NN

The above matrix shows global currency transactions: 11 means country 1 is buying and selling its own currency, 12 means country 1 buying and selling country 2’s currency, and so on. It is assumed there are no restrictions –this is a free international foreign-exchange market.

The syllogism then leads to the “minor premise” which we crank up from logical derivations out of economic theoretical constructs. What’s that?

The matrix presented above under the rubric MAJOR PREMISE actually underlies the set of “independent variables and parameters” that shape up each of these individual scalar (such as 13 or N2) in the whole global ratios. These ratios as presented don’t come up on their own but are brought forth by a complex interplay of all those independent variables and parameters which are the “causal factors.” What are those causal factors?

As I have already explained to you in my answer to your earlier question, these causal factors are the demand for and supply of goods and services all the countries have from all other countries in the world. Definitely the amount of a particular foreign currency an individual or a business requires is prompted by the requirement to buy the goods and services from that particular country.

If we take that view into consideration, then the foregoing financial matrix is in fact supplanted by a “commodity matrix.”

We know that the commodity matrix is in real terms, whereas the financial matrix is in “relative” terms. Commodity matrix is deterministic, financial matrix fluid based on disparate “artificial restrictions put up by different countries” on the basis of politico-economic and social differences.

To give an example of the volatility of the character of the financial matrix, I went to Mumbai some long time back to work for a short time at IDBI and ICICI. The international organization gave me $100 per day. That’s a small sum in Toronto, and I can’t even put up in a decent hotel, if I were to have the same assignment here. But $100 seemed to me more than sufficient because, with only a fraction of the amount I could get accommodation at Colaba in a medium-standard hotel, besides getting free transport and lunch from the bank. I could get a cup of coffee for only Rs. 90 (hardly $2) in a top-class restaurant; a similar treatment would require at least $5 here; and I could get a cup of tea for about Rs. 10-15 in an ordinary restaurant, and here the cheapest cup would be at least Rs. 70-80 in Indian currency. On the other hand, somebody with a decent job in a bank here may buy a second-hand Mercedes with only one month’s salary, which is simply unimaginable for a banker in India. On average, food takes up only a fraction of income here, but food takes up almost the whole income in India. Hence you will find so many divergent ratios of relative prices. This is a matrix caused by the vagaries of international relative prices.

When each of the N countries of the world allows purchase and sale of foreign exchange without limit, it sets in motion forces of global demand and supply in foreign exchange based on the demand and supply in commodities. When this happens, individuals and businesses buy and sell foreign exchange in each country to make profits.

You know that if in a theatre someone stands up to watch better, he gets a better view. However, if everybody stands up, nobody can watch better. The same thing will happen in a totally free global foreign exchange market. Every buys and sells, say, the currency of a certain country. Their unrestrained biddings will make the value of the currency converge to an equilibrium value, just as in microeconomics you find demand for and supply of a commodity quashes excess demand or excess supply and brings about equilibrium quantity and equilibrium market price. The same way things will work for currencies of all other countries.

The umpteenth result of this will be an internationally acceptable, mutually exchangeable, non-flexible set of ratios for each country’s currency across continents. Hence, for example, Country X can buy the Currency of country Z at exactly the same rate as Country Y would buy currency of Country Z. This will happen for each and every country, and the value of the currency of Z will be the same in all the countries. So the desire of merchants to buy or sell Z’s currency will no more be there. Similarly, this will take place for each and other countries. No country would like to buy or sell currency of the other country for two compelling reasons.  First, nobody will enter into foreign-exchange buying or selling because the business is not at all lucrative. Secondly, nobody would bother to buy or sell foreign exchange because he or she can buy the commodities from those countries with the national currency, since all currencies are accepted everywhere. This degenerates into a virtual single currency.

The rate of exchange in India will be such that an Indian will spend $5 for a MacDonald hamburger, but he will not have to pay 5 times Rs. 53.78, but maybe half an hour’s income of an ordinary worker (as is in NY or in Toronto). Say a school teacher in NY gets $25 an hour, then a school teacher in Dera Dun won’t get 25 times Rs. 53.78 per hour (or Rs. 1344.5/hour), which would make her earn lakhs of rupees a month! Think of a professor at a university: it would be 125 times Rs. 53.78 (=Rs. 6722.5) an hour!

Again, the average cost of living in low in India. So the exchange rates in the foreign market that we see are not true reflectors of the values of commodities in the market.
Hence, on the basis of what you have now in India, there will be a formidably big impact on the currency exchange rates between Indian rupees and U.S. dollars, if restrictions on buying and selling of foreign exchange are abolished on the global turf.

Yes, Prashant, this situation will never obtain because of the greed and market imperfections as well as because of the divide between the haves and the have-nots. The artificial but real-life scenario with a volatile inter-country foreign-exchange matrix will stay put.
I hope I have been able to make myself clear. Please work on these lines. Remember simple ideas lead to great discoveries! Best of luck.  


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Eklimur Raza


It appears some students in this website are confused about elasticity of demand and the slope of the demand curve when they are trying to figure out why rectangular hyperbola comes up in case of unitary demand curve. First, they don't know that RH can be depicted in a positive quadrant of price,quantity plane. Secondly, they make the mistake that the slope of RH is constant at -1. Two points could help them: first, e=1 at each and every point of the RH, because the tangent at any point shows lower segment=upper segment (another geometric definition of e); yet slopes at different points,dQ/dP, are different; second, e is not slope but [(Slope)(P/Q)]in absolute terms. Caveat: only if we measure (log P) along the horizontal axis and (log Q) up the vertical axis, can we then say slope equals elasticity --in which case RH on P,Q plane is transformed into a straight-line demand curve [with slope= -tan 45 deg] on (log Q),(logP) plane, and e= -d(log Q)/d(log P). [By the way, logs are not used in college textbooks --although that is helpful in econometric estimation of elasticity viewed as an exponent of P, when demand equation is transformed into log-linear form.] I have not found the geometrical explanation I have given in any textbook followed in undergraduate and college classes in Canada (including the book followed in a university where I taught for a short time and in the book followed in George Brown College, Toronto, where I teach.


About 11 years' teaching economics and business studies, and also English, history and elementary French.Practical experience in a development bank, working with international donor agencies like the World Bank and the ADB. Experience in free-lance journalism, including Canada's "National Post."

I teach micro- and macroeconomics at George Brown College (continuing education), Toronto, ON, Canada.

Many articles and editorials, on different subjects, in English newspapers. Recently an applied Major Research Paper, based on a synthesis of the Solow growth model and the Lewis two-sector model, has be accepted by Ryerson University, Toronto. Professors Thomas Barbiero and Eric Cam, Ryerson University, accepted the paper.

Master degree in Interantional Economics and Finance and diploma with honours in Business Administration from Canada.

Awards and Honors
Received First Prize in an inter-university Literary Contest.

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