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Economics/Foreign Exchange Money Purchase Power.


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Foreign Exchange  
QUESTION: Dear Michael

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: The restrictions that exist on foreign exchange transactions, if any, will depend on a few different factors.  

Some nations have restrictions on their own citizens exchanging currency.  This is usually just a government control tactic intended to keep people from performing unapproved exchanges, or trying to leave the nation.

Some nations have restrictions on the exchange of specific types of foreign currency.  This usually happens when one nation has trade sanctions on another nation.  Other times, a currency can just be very high-risk to hold, so that it becomes very difficult to find, but that's more of a market issue than a legal one.

Some nations have restrictions on any money at all leaving their borders.  This is usually an attempt to increase the amount of total capital and investing in the nation, to promote growth.  They believe, incorrectly, that when a company invests in a nation, that if they can't repatriate their profits, that they will invest those profits back into growing the nation.  The result usually ends up being that no companies invest in that nation due to these restrictions.

Note that any of these can be absolute restrictions, enforced regardless of amount, while in other nations such laws may only be enforced if the total amount exceeds some quota.  For example, in China, a foreigner may exchange small amounts of RMB for USD every day, but the amount cannot exceed that daily quota.

Sometimes there are no restrictions at all.  In the US, a citizen can exchange as much USD for GBP as they want.

So, to answer your question, whether there are restrictions on foreign exchange transactions will depend on the nation you're in, your citizenship, and the types of currency you want to exchange.

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

QUESTION: Dear Dr Michael

Thank you.

By imposing foreign exchange money restrictions/regulations/rules/laws purchase power limits, does it affect the economic development of the country ?

Awaiting your reply,

Thanks & Regards,
Prashant S Akerkar

ANSWER: Yes, imposing foreign exchange restrictions does affect economic development.  The exact nature of that developmental influence must be assessed on a case-by-case basis, though; there will be consistent economic pressures applied, by the way in which a nation's economy responds to those pressures will depend on other variables related to their economy.

For example, when a nation pegs their foreign exchange rate to another nation's currency (so that their currency fluctuates on the foreign exchange market in value at a constant ratio of another currency), it can be very beneficial for small nations attempting to reduce exchange rate volatility, or it can hamper economic growth in large economies by limiting responsiveness to international demand (particularly for reserve currencies like the US Dollar, Euro, Japanese Yen, etc.).  The difference between the two is that small nations, particularly those with a narrow range of domestic industries, will experience high volatility in exchange rates that can make economic management nearly impossible to control unless they peg their currency, while a larger nation with diversified industry won't experience this volatility, so their focus will remain on maximizing growth and stability by ensuring their economic policies are aligned with domestic and international pressures.

Generally speaking, any regulations that limit international transactions, either in trade or foreign exchange, tend to be a bad idea.  They tend to reduce production efficiency, thereby increasing costs through higher resource consumption for equal output, resulting in reduced international competitiveness and total economic potential.  Management that facilitates and promotes development can be applied without imposing restrictions, though, and each nation must carefully evaluate the manner in which to best promote both growth and development within their nation.

As a side note, keep in mind that there is a difference between growth and development.  Growth, which means creating a bigger more productive economy, is a part of development in that more available resources per person allows a nation to improve overall quality of life.  Development itself, though, refers to improved quality of life, which doesn't include just increased wealth, but also the manner in which that wealth is allocated and utilized to make life better.

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

QUESTION: Dear Prof Dr Michael

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

If legal restrictions on foreign exchange transactions between two nations exists, then the amount of influence that removing those restrictions will have depends on the severity of the restrictions themselves.  The supply and demand for foreign exchange transactions between those two nations will be variable, but at any moment absolute.  All other things being constant, if one nation's currency begins to appreciate in value, then demand for that currency will increase as investors try to accumulate more of it and raise the value of their assets.  Whether a government places restrictions on foreign exchange transactions doesn't matter; investors may be legally prohibited from exchanging currencies, but they will still want to.  So, if a government lifts restrictions on foreign exchange transactions, then the supply and demand for that currency will finally reach equilibrium.  The exact amount of economic impact this will have depends on the size of the differential between market equilibrium for price and quantity of that currency, and the artificial equilibrium created through government restrictions.

For example, if the artificial equilibrium established through government restrictions is a quantity of 0 quantity and 0 price (meaning, no foreign exchange transactions between these two nations), and market equilibrium is 100 quantity and 100 price, then there will be a greater economic impact than if the market equilibrium is 50 quantity and 50 price, because the differential is bigger, so there will be a much larger transition.  So, the exact size of the economic influence depends on the differential between the natural and artificial foreign exchange equilibrium.

As for the type of impact, the initial influences will be on investing and trade.  As foreign exchange transactions increase as a result of reduced restrictions, the value of these currencies relative to each other will also shift, causing a change in both exchange rate as well as purchasing power parity.  So, there will be high incentive for investors to be very fast in taking advantage of these shifts, and that will be the very first move made by the private sector.  Next, the shift in currency values will influence the price and quantity of trade between the two nations, causing a shift in their relative balances of payments, but this will eventually even itself out as both nations experience factor price equalization through trade.  As each nation attempts to manage the shift in trade, investing, employment, and inflation resulting from their shift in foreign exchange, if the transition is large or volatile enough, they will both alter interest rates, taxation, and spending in order to make it go more smoothly.  The tertiary impacts will then depend a lot on the decisions made by government officials in each nation, which is often difficult to predict because they are frequently made for political or personal reasons, rather than for economic ones.


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Michael Taillard


Accepts most economic questions


Consulting with major corporations, government agencies, political organizations, small businesses, non-profits, start-ups, and even individual people. Teaching at universities around the world, and developing original coursework. Performing original research and analysis. Writing books and scientific studies.

American Economics Association

Publications You can also check Proquest for a small selection of my research.

PhD (Financial Economics; honors) -- MBA (International Business Finance; honors) -- Grad School Certificate (International Business Management; honors) -- BS (International Business Economics; honors) -- AA (Business Administration; honors) -- Certificate (Chinese Language and Culture) -- Trade School (Transportation Logistics; honors)

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