Please explain this to me....?

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I will pick a best answer.

(I tried to read this and understand it and it made my head hurt. Put it into layman's terms if it's not already and give me a real life example.)

 International Financial Practices

The financial principals which apply to the relationships between different countries are an expansion of those which apply within a single country. When goods are exchanged between countries, they must be paid for by commodities or gold. They cannot be paid for by the notes, certificates, and checks of the purchaser's country, since these are of value only in the country of issue. To avoid shipment of gold with every purchase, bills of exchange are used. These are claims against a person in another country which are sold to a person in the same country. The latter will buy such a claim if he wants to satisfy a claim against himself held by a person in the other country. He can satisfy such a claim by sending to his creditor in the other country the claim which he has bought against another person in that other country, and let his creditor use that claim to satisfy his own claim. Thus, instead of importers in one country sending money to exporters in another country, importers in one country pay their debts to exporters in their own country, and their creditors in the other country receive payment for the goods they have exported from importers in their own country. Thus, payment for goods in an international trade is made by merging single transactions involving two persons into double transactions involving four persons. In many cases, payment is made by involving a multitude of transactions, frequently in several different countries. These transactions were carried on in the so-called foreign-exchange market. An exporter of goods sold bills of exchange into that market and thus drew out of it money in his own country's units. An importer bought such bills of exchange to send to his creditor, and thus he put his own country's monetary units into the market. Since the bills available in any market were drawn in the monetary units of many different foreign countries, there arose exchange relationships between the amounts of money available in the country's own units (put there by importers) and the variety of bills drawn in foreign moneys and put into the market by exporters. The supply and demand for bills (or money) of any country in terms of the supply and demand of the country's own money available in the foreign-exchange market determined the value of the other countries' moneys in relation to domestic money. These values could fluctuate—widely for countries not on the gold standard, but only narrowly (as we shall see) for those on gold.

simplicitus · Accepted Answer

It is just like checking accounts. When you receive checks, you don't cash them at the banks from which the checks came, you cash or deposit them at your own bank. Then your bank bundles up the checks it has from each other bank and every other bank does the same, and eventually they exchange the net difference - how much each banks owes or is owed by ach other bank after adding up all the checks.

It is the same idea here except that each bank is operating in a separate currency so the final exchange involves the foreign exchange markets or the transfer of gold.

For another example:

- Jack buys a beautiful 500,000 Yen kimono for his wife so he now owes Yumiko 500,000 Yen.

- Keisuke buys $5,000 worth of soybeans from Farmer John, so he owes Farmer John $5,000.

A dollar is now worth 97.78 yen so Jack owes Yumiko the equivalent of $5.113.52 and Keisuke is expecting to pay 488,900 yen.

So it makes sense for Keisuke to give Yumiko 488,900 yen instead of converting that money to dollars or gold and sending it to Farmer John, for Jack to give Farmer John $5000, and to convert the $113.52 into yen and send it to Yumiko.

The result is that everyone gets their money, but only a small amount has to be converted and sent across the Pacific.

Of course, how is Jack going to know about Farmer John and Yumiko to know about Keisuke? That is where specialized trade banks and export-impact banks come in.
http://en.wikipedia.org/wiki/Export-Import_Bank_of_the_United_States
http://en.wikipedia.org/wiki/Trade_finance
http://en.wikipedia.org/wiki/Export_credit_agency

The final settlements involve the foreign exchange markets and the central banks. Now, of course, there is no transfer of physical currencies or gold, just electronic transfers between major international banks
http://en.wikipedia.org/wiki/SWIFT
Some of those transfers never leave the country but stay in accounts at the Fed
http://en.wikipedia.org/wiki/Fedwire

Most of the actual gold just sits in the basement of the Federal Reserve in New York
http://en.wikipedia.org/wiki/United_States_Bullion_Depository

Erika · Answer

All i p.c. for Christmas is my 2 front teeth ( I had an accident years in the past and the front have porcelin caps that would desire to get replaced in approximately 2 months while i will have stored sufficient money to interchange them!)

Please explain this to me....?

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