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Most of exports and imports involve finance i.e. receipts and payments in money. An account of all receipts and payments is termed as Balance of Payments (BOP). All the transactions entered in the BOP can be grouped in 3 groups: -Trade account balance -Capital account balance -Current account balance -Foreign exchange reserves
2.International Trade:
Exchange rates affect international trade by influencing the prices of goods. Exports sell for low prices overseas when the domestic currency has been devalued. imports become more expensive when the home currency is weak. Central banks manipulate foreign exchange reserves for competitive advantages. Export economies add to foreign exchange reserves in order to devalue the home currency and sell cheap goods overseas. Ex: China leads the world in foreign exchange reserves and carries over $2 trillion in U.S. dollars, which effectively devalues the Yuan and drives China's export economy.
The interest income will not overcome the losses realized from
holding depreciating currency.
Conclusion
FOREX reserves play a key role in the Balance of payments. So every country should improve their reserves by improving their capital investments and international trade.