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I was thinking about this scenario, where a country X wants to buy some toys (worth of 100$) from country Y. both of them have their own currency-- not USD. So, now, how does the exchange happen between X & y?

will the country X print 100$ equivalent of X's currency and convert that into US Dollars? or will country X exchange gold worth of 100$ to buy those toys from Y?

P.s. If I sound too dumb, its OK, I can handle that, am new to economics & trade.

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In general one country cannot just print currency of other country. At least not legally, I suppose some countries could engage in counterfeiting.

A country has to go to foreign exchange market where they purchase the currency of the other country first and then make the transaction in that currency. In practice the foreign exchange market is ‘accessed’ just by making bank transfer where banks converts the money at the current exchange rate, same as you would when you order stuff from other country on internet or when on vacation.

Gold was used in international trade before modern age where gold and silver was kind of an universal currency. The only difference was in the gold and silver content of the coins so once that was accounted for, for all practical purposes, countries were basically in a monetary union - in fact Euro is often compared to gold standard see Eichengreen and Temin’s work on this here. But this system is no longer used as it’s impractical to ship gold between countries when floating exchange rates can do the same if not even better job with just paper fiat money.

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  • $\begingroup$ thank you for your answer, I am still unclear, you said: "A country has to go to foreign exchange market where they purchase the currency of the other country first "............. and that's where my question is-- how do they purchase other countries currencies-- using their (X) currency? $\endgroup$ – RaGa__M Jan 3 at 6:18
  • $\begingroup$ @RaGa__M yes the same way as you. For example, if the exchange rate between pound and dollar is 1.5 then with one pound you can buy 1.5 dollars or 100 pounds would buy 150 dollars etc. It’s exactly like you would do it at currency exchange when traveling. If you ever been abroad you must have some experience with it it. $\endgroup$ – 1muflon1 Jan 3 at 9:24
  • $\begingroup$ then it is just like the country X buys from Y for nothing right? X will just print its money worth of 100$ and exchange it.......... @1muflon1 $\endgroup$ – RaGa__M Jan 3 at 9:33
  • $\begingroup$ @RaGa__M it’s not that easy. In principle yes country x could print 100\$ and exchange it but printing money increases inflation and exchange rate depends also on the rate of inflation. Hence there is no way that country X can ‘cheat’ it’s way to some free goodies from abroad just by printing more money. Also it’s not for nothing the foreign country gets to keep your currency which they can then use with trade with your country on convert it with trade with other country. Nowadays all money are just pieces of paper but I would not say that if you sell a car for 1000\$ you are getting nothing $\endgroup$ – 1muflon1 Jan 3 at 9:59
  • $\begingroup$ Dude. I think you need to edit your comment. $\endgroup$ – RaGa__M Jan 3 at 10:00

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