What happens to Money when it's spent outside its country of origin?

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    Specifically US dollars when spent in France for instance. I assume they don’t circulate dollars in France so even if some businesses accept them they must a some point be exchanged. Must they come back in some way or do they get sorted out between the two nations banks as a matter of key strokes and not in any sort of trade?

    Also I have heard the dollar is the only unit of exchange for certain things in the world market and in order to trade a foreign nation must convert to dollars to make a purchase. Is there any truth to this and if so what does this accomplish?

    This might be an aside but does “balance of trade” carry any weight as a concern? I assume any trade is necessarily balanced even if one side is only trading money and the other side is trading products as the country trading products must value the others currency. In such a case will that money come back to the country of origin in some way?


    Foreigners can either hold the dollars overseas or spend them back in the U.S. If spent in the U.S., foreigners can either buy goods and services or make financial investments. As you say, the balance of payments accounts record the consequences of theses actions and are designed to always balance.

    Of all the dollar currency in circulation, approximately two-thirds is held by foreigners overseas. They do this for buying goods which are bought and sold in dollars, as you suggest, and as a safe-haven asset.


    A given money, like the dollar, moves from one place to another based on differences in its market value, i.e., its purchasing power. If the purchasing power of the dollar were lower in New York City than in Denver, people would shift their demands to Denver until no difference remained. If the purchasing power of the dollar were lower in New York City than in Paris, people would shift their demands to Paris. To do so, they would sell dollars to buy Euros pushing the exchange rate of the dollar down until its purchasing power was the same in both places. The balance of payments accounts simply record the results of people’s actions which are determined by their preferences.

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