ABSTRACT
Trade theory predicted that comparative advantage would lead to specialization and trade. The globalization of production chains has been accompanied by the internationalization of finance and financial institutions. Trade in intermediate goods is financed by banks and other financial institutions located in the home markets of exporting firms as well those in host countries. Global imbalances are usually measured by current account balances, that is, net changes in exports and imports of goods and services and other unilateral transfers such as gifts and migrant worker earnings. Imports generate a need for foreign borrowing and generate debt service payments, which will require payment in foreign currency. An exchange rate is the number of units of a given currency that can be purchased for one unit of another currency. The foreign exchange market is a place where foreign currency is purchased and sold.
