Aggregate supply and demand in foreign exchange market.

Aggregate supply and demand in the foreign exchange market.

Aggregate supply and demand in the Foreign Exchange market, just like any other traditional markets around the globe, is operated by supply and demand.

Knowing the concept of supply and demand is very important in the Forex market.

Before going to discuss the topic as mentioned above, I think everyone learns the basic concept of Supply and Demand.

So let’s start from here.

What is Supply?

Supply is the evaluation of how much specific Financial assets are available at any one time.

The value of a commodity, “currency”, in this case, that directly linked to its supply. 

As the supply of any financial assets like “currency” and others increases, they become less valuable. 

Conversely, as the supply of any financial assets like “currency” and others decreases, they become more valuable.

Think about rocks and diamonds. 

Rocks are not very valuable due to they are available everywhere. 

Diamonds, oppositely, are expensive because there are not more in supply in the traditional market. 

There is a small supply of diamonds available in the world, and you have to pay a massive amount of money if you want one.

What is Demand?

Demand is the evaluation of how much of a specific commodity people want at any one time. 

Demand for financial assets, “currency” has the opposite result on the value of a “currency” than does supply.

As the demand for particular financial assets like “currency” increases, the financial assets “currency” becomes more valuable. 

Conversely, as the demand for Financial assets like “currency” decreases, they become less valuable.

Graph for aggregate Supply and Demand.

To represent how supply and demand interact to show a perfect exchange rate in the Forex market, we use a standard supply and demand graph.

Aggregate Supply and Demand 1

Supply is pointing out by a “Red diagonal” line that managed from a low point at the left to a high point at the right.

Demand is pointing out by a “Green diagonal” line that managed from a high point at the left to a low point at the right.

The “y”, or vertical, axis represents a price “P”, and the “x”, or horizontal; axis “Q” represents the quantity of supply and demand.

Finally, the perfect exchange rate denotes by the point at which the two diagonal lines intersect. 

In this case, the supply and demand graph specifies that the perfect exchange rate for the GBP/USD pair is $1.3100.

Show an increase and decrease in supply.

Increase Supply right and left

If supply is increasing, you move the diagonal supply line farther to the right and then price will decrease.

So if supply is decreasing, you move the diagonal supply line farther to the left and than price will increase.

Show an increase and decrease in demand.

Increase demand right and left

If demand is increasing, you move the diagonal demand line farther to the right and than price will increase.

And so If demand is decreasing, you move the diagonal demand line farther to the left and than price will decrease.

Demand rising, Supply falling, price rising dramatically.

Demand rising, supply falling, price rising dramatically

You see a dramatically shifting in the perfect exchange rate for the GBP/USD pair from $1.3100 to $1.3150, when both the supply and demand lines are moving.
For example, if demand for a currency suddenly increases while
supply is decreasing, the perfect exchange rate level will climb very quickly and price will increase for that financial assets like “Currency”.

Demand falling, supply rising, price falling rapidly.

Demand falling, supply rising, price falling rapidly

You see a again a dramatically shifting in the perfect exchange rate for the GBP/USD pair from $1.3100 to $1.3050, when both the supply and demand lines are moving.
For example, if demand for a currency suddenly decrease while
supply is increasing, the perfect exchange rate level will drop very quickly and price will decease for that financial assets like “Currency”.

we have completed basic of demand and supply as well as rules with supply and demand curve so now I am going to describe Aggregate supply and demand in short.

Aggregate supply means any country or any organization produce total quantity of demanded products and sell them.

Aggregate demand means any country or any organization provide total spending of goods and services in an economy.

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About Muhammad Shahid

My name is Muhammad Shahid, MBA in Finance from IBA, University of Sindh, Professional Forex Trader & Trainer, I have taught more than 850 Students throughout the Sindh.

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