Discuss any two factors which directly affect the demand for foreign exchange of a nation.

Question

Accepted Answer

Two factors which directly affect the demand for foreign exchange of a nation are:

1. **Imports of Goods and Services:** When a country imports goods and services from other countries, it needs foreign exchange to make payments. Higher imports lead to higher demand for foreign exchange. For example, if India imports oil from Saudi Arabia, it needs US dollars to pay for it, increasing the demand for dollars.

2. **Tourism:** When domestic residents travel abroad for tourism, they need foreign currency to cover their expenses. Increased tourism abroad leads to higher demand for foreign exchange. For example, Indians traveling to Europe need Euros, which increases the demand for Euros in India.