Why would the citizens of one country demand the currency of another country, in return for their own? To trade in real goods and services. In our example, Americans demand British Pounds in order to buy British goods for import. Let's look at the imports, exports, supply and demand for a particular good, Cheshire Cheese. We are taking the exporter's point of view, so all prices are in British Pounds.
In this example, as the diagrams show, the United States has an excess demand for cheese, amounting to Q4- Q3, while Britain has an excess supply, amounting to Q2- Q1. But this is the market for cheese as a whole, in each country. When we look just at the supply and demand for cheese to be exported from Britain to the United States, the United States' excess demand is its demand for imported cheese, while Britain's supply of cheese for export is the excess supply of its domestic market. The equilibrium price, p, is the price just high enough to balance the U. S. excess demand against the excess supply in Britain. That is the world price of cheese, and it is the price that makes world supply equal to world demand. As shown here, world supply is in equilibrium -- the excess supply in the exporting country, Britain, being just equal to the excess demand in the importing country, the U. S. A.
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