Foreign Exchange Markets and the Gold Standard

Understanding how the foreign exchange market functions is the key to the success of the international business person. The foreign exchange market is the largest market in the world. This market is also the center for worldwide currency exchanges. The foreign exchange market, otherwise known as FOREX or "FX", has more currency circulating through it than the total amount of all the world's stock market. According to G. Prountzos, "It is an over-the-counter market where buyers and sellers conduct business linked by telephones, computers, fax machines, and other means of instant communications. It also involves trading one nation's currency for the currency of another nations."

There are several things that make the Foreign Exchange market so unique. The first is the fact that it is always under analysis. There are so many countries involved that the value of the currency is not always the same. The federal exchange market keeps the merchandise trade balance in check. "The merchandise trade balance is the net difference between the value of merchandise being exported and imported into a particular country" (Prountzos, 2003).

When one country trades with another they may have to trade their currency for the currency of the country they want to trade with uses. The demand created for the goods and services from one country to another is the merchandise trade balance between two countries.