Imagine you’re a traveller who wants to buy a souvenir in another country.
To pay for it, you need the local currency – that’s the reason you buy foreign money.
Conversely, if you’re a company that sells goods abroad, you’ll need to sell the foreign currency you receive back into your own currency to pay suppliers or invest at home.
💸 The exchange rate tells you how many units of your currency you’ll get for one unit of the foreign currency.
• Who sends remittances? Workers who migrate abroad to earn a living.
• Why do they send money home?
• How much is sent? In 2023, global remittances reached about $540 billion, a huge chunk of many developing economies’ foreign exchange inflows. 📈
When workers send money back home, they usually exchange foreign currency (e.g., USD) for the local currency (e.g., INR).
This increases the demand for the local currency, which can push its value up relative to the foreign currency.
Mathematically, the change in the local currency’s value can be approximated by:
\$ \Delta E{local/foreign} \approx \frac{M{remittances}}{Q_{local}} \$
where \$M{remittances}\$ is the total remittance volume and \$Q{local}\$ is the supply of local currency.
If \$M{remittances}\$ grows faster than \$Q{local}\$, the local currency tends to appreciate.
Conversely, if the local economy is weak and remittances fall, the currency may depreciate. 📉
• Remember the definition: Remittances are a type of capital inflow that increases the supply of foreign currency and the demand for the local currency.
• Use the analogy: Think of remittances as “money rain” that boosts the local economy’s “currency cloud.”
• When asked to explain the effect on exchange rates:
• Check the question wording: If it asks about “capital outflow,” remember remittances are an inflow, not an outflow.
📚 Good luck!
| Currency | Rate (local per foreign) |
|---|---|
| USD | 6.50 |
| EUR | 7.80 |
| GBP | 8.90 |