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The Role of Money in International Transactions

Money plays a vital role in the economic system of any country. Modern trade transactions whether within the country or at the international level, is based on money. Without foreign currencies, exchange of goods and services across international boundaries would have been impossible. So any resident of a country wanting to purchase goods from abroad must make payment in foreign currency.

Secondly, by serving as a medium of exchange, money facilitates the exchange of good and services among countries in the international market. In international trade, credits are sometimes given and payments are made later. Thus, money enables countries to buy goods on credit in the international market.

Also surplus foreign exchange from international trade is kept as reserves in the form of gold or international currencies such as the dollar. Such surplus enables countries to finance their budget deficits. Without money, the balance of trade and payment accounts cannot be recorded in monetary terms. Money is therefore used to determine the value of exports and imports. This has helped to solve the problem of keeping international transactions in monetary terms.

At the international level, some advanced countries like USA, Germany, use foreign currency to give financial aid to some of the poor countries. This money facilitates economic development by means of foreign capital, thereby helping in the development process of the less developed countries.
Besides, the use of money promotes global trade, which encourages optimal use of the world’s resources.