Derived Demand: The Goods Market & Forex Market Simulation

This interactive simulation demonstrates how exports and imports in the Goods & Services Market affect a country's currency value through the foreign exchange (Forex) market. Adjust the levels below to see how trade balances influence currency strength and shift the supply and demand curves.

Key Concepts: When exports increase, foreign demand for the domestic currency rises (demand curve shifts right). When imports increase, domestic supply of the currency increases (supply curve shifts right). The intersection of these curves determines the equilibrium exchange rate.

Higher exports increase foreign demand for your currency.

Higher imports increase supply of your currency in Forex markets.

Trade Balance
0
Domestic Currency Strength
1.00
Currency Status
Stable

Forex Market: Supply and Demand for Domestic Currency

Economic Concepts Explained
Exchange Rate Determination

The exchange rate is determined by the interaction of supply and demand for a currency in the foreign exchange market. This simulation simplifies the complex forex market to show the fundamental relationship between trade flows and currency values.

Exports and Currency Demand

When a country exports goods and services, foreign buyers need to purchase the domestic currency to pay for those exports. This increases demand for the currency, which tends to appreciate its value (higher exchange rate).

Imports and Currency Supply

When a country imports goods and services, domestic buyers need to sell their currency to obtain foreign currency to pay for imports. This increases supply of the domestic currency in forex markets, which tends to depreciate its value (lower exchange rate).

Trade Balance

The trade balance is the difference between exports and imports of goods and services. A trade surplus (exports > imports) typically strengthens a currency, while a trade deficit (imports > exports) typically weakens it. However, in reality, many other factors also affect exchange rates.

Real-World Considerations

While this simulation focuses on trade flows, actual exchange rates are influenced by many factors including interest rates, inflation, political stability, economic performance, and speculative flows. Central banks may also intervene in forex markets to influence their currency's value.