Consider the market for the British pound sterling (GBP). Note that although the
ID: 1225207 • Letter: C
Question
Consider the market for the British pound sterling (GBP). Note that although the United Kingdom (Great Britain) is an official member of the European Union, it has chosen not to adopt the euro as its official currency. For each of the following, determine whether the situation described is part of the supply, demand, or neither side in the foreign exchange market for GBP.
a. John and Adam are British economists who are going to Washington, D.C. for an economics conference. In the foreign exchange market for GBP, John and Adam are part of .
b. An American pharmaceutical firm buys a smaller competitor based in London. In the foreign exchange market for GBP, the American pharmaceutical firm is part of .
c. Louise, who lives in France, is going on a vacation to Germany. In the foreign exchange market for GBP, Louise is part of .
d. Kamran, who moved to Great Britain from India to work as an engineer, sends some of his paycheck each month to his parents in India. In the foreign exchange market for GBP, Kamran is part of .
e. An economics class from the United States is traveling to Great Britain as part of a study-away program. In the foreign exchange market for GBP, these students are part of .
Explanation / Answer
(a)
Both British economists are going to Washington D.C. for an economics conference. As both economists are travelling to United States, they will need US dollars. In order to obtain US dollars, they will exchange the British Pounds for US dollars. Since, they are exchanging or selling their British pounds for US dollars, they are supplying British pounds in market for British Pound Sterling (GBP).
So, in the foreign exchange market for GBP, John and Adams are part of supply side.
(b)
US firm have bought a firm in London. This means US firms will need British Pounds to pay for the acquisition and seal the deal. So, US firm will purchase the required quantity of British Pounds from market for the British Pound Sterling. Purchase implies demand.
So, in the foreign exchange market for GBP, the American pharmaceuticals firm is part of demand side.
(c)
Louise resides in France and has gone on a vacation to Germany. Both Germany and France has same currency i.e. Euro. So, Louise will not have to undertake any exchange of currencies. Moreover, as Louise is not visiting or having anything to do with Great Britain, Louise will not need British pound at all.
So, in the foreign exchange market for GBP, Louise is part of neither side.
(d)
It has been provided that engineer sends some of his paycheck each month to his parents in India. This implies that a part of paycheck is converted into Indian currency and is remitted to India. Conversion to Indian currency implies that a part of paycheck which is denominated in British Pounds is exchanged for Indian currency. In other words, British pounds are supplied in foreign exchange market for purchase of Indian currency.
So, in foreign exchange market for GBP, Kamran is part of supply side.
(e)
Students of economics class traveling to United States will need US dollars to bear their expenses during the stay in United States and thus will exchange their British Pounds for US dollars. This implies they will supply British Pounds in foreign exchange market to obtain US dollars.
So, in foreign exchange market for GBP, these students are part of supply side.