Q. Consider the following statements:- The price of any currency in international market is decided by the World Bank
- Demand for goods/services provided by the country concerned
- Stability of the government of the concerned country
- Economic potential of the country in question
Which of the statements given above are correct? (UPSC Prelims 2012)
Answer:
2 and 3
Notes: The correct answer is
[B] 2 and 3.In the international foreign exchange market, the value of a currency is primarily determined by the forces of
demand and supply. Let’s break down why each statement is correct or incorrect:Analysis of the Statements:
- Price decided by the World Bank (Statement 1 is Incorrect): The World Bank provides financial and technical assistance to developing countries, but it does not determine the price of any currency. In the modern global economy, most major currencies operate under a Floating Exchange Rate system, where the market decides the value.
- Demand for goods/services (Statement 2 is Correct): This is a fundamental driver. If there is high global demand for a country’s exports (goods and services), foreign buyers must purchase that country's currency to pay for them. This increased demand leads to the appreciation (rise in value) of that currency.
- Stability of the government (Statement 3 is Correct): Political stability is a key indicator of economic health. Investors prefer countries with stable governments because there is less risk of sudden policy changes, civil unrest, or economic collapse. High stability attracts Foreign Direct Investment (FDI), which increases the demand for the currency.
- Economic potential (Statement 4 is generally considered Incorrect in this specific context): While "economic potential" sounds relevant, it is often seen as a future prospect rather than a direct, immediate determinant of current exchange rates. Exchange rates react more strongly to current performance (GDP, inflation, interest rates) and investor sentiment rather than just potential.