Keeping other factors constant, explain how a spending of foreign tourists in the home country and fees payments of overseas students affect the demand and supply of foreign exchange.

Question

Accepted Answer

**Effect of Foreign Tourists' Spending:**
When foreign tourists spend in the home country, it represents an export of services (tourism). This increases the supply of foreign exchange in the home country because foreign tourists bring in foreign currency and exchange it for domestic currency. For example, American tourists visiting India bring dollars, which increases the supply of dollars in India.

**Effect of Fees Payments by Overseas Students:**
When overseas students pay fees to educational institutions in the home country, it also represents an export of services (education). This increases the supply of foreign exchange because the students' families send foreign currency to pay for education. For example, Indian students studying in the US need to pay fees in dollars, which increases the supply of dollars in India.

Both transactions are credit items in the balance of payments as they involve receipt of foreign exchange.