In the year 1776 Adam Smith published the book “The Wealth of Nations”. In which the principal ideas of the liberal stream of thought were summed up. According to Smith, the working of the market is because of the invisible hand. This allows the economy to be efficient, that means that people can satisfy their needs in the cheapest possible way without wasting or stop using the available resources.
Adam Smith set up the basis of the rules of the capital market regulated by the supply and demand of foreign currencies. The forex market is an example of that, as in that place currency quotations are established based on the supply and demand of foreign currencies.
The origin of the supply and demand of foreign currencies at the capital market is originated through various factors.
For example, the supply of foreign currencies is originated from the active transactions of the payments balance, as exports of goods and services, incomes from investments of the country abroad.
The origin of the demand of foreign currency is originated on passive transactions or debits of the balance: imports of goods and services, payments for the performance of the foreign investment in the country, donations and money orders sent by residents and exports of non monetary capital; the most stable element of the demand is about the import of goods and services.
The exchange rate of a currency is only the balance between the supply and demand of this currency. The flows of international currencies are the ones that determine the dimension of both curves. The supply of a foreign currency will depend on the exports of goods and services of the country and the demand depends on the imports of goods and services, of the transfers done to other countries and the outflows of capital for different reasons.