Day 72: The Money Supply - Part 2

There are two other factors that can influence the money supply: international transactions and government transactions.

2. International Transactions

Note that we are here looking at how the money supply within the economy of a particular country can change.

The influence of international transactions on the money supply is rather simple: If money comes into the country, then the money supply increases - when money goes out of the country, the money supply decreases.

What does it mean: money moving in or out of a country?

Most countries have an adopted an open market policy throughout the years - either willingly or under pressure - which means, for instance, that people in France can buy products from China. In this example, where China sells goods to France, we say that China is the exporter who exports goods to France - and France is the importer, who imports goods from China. The direction in which the goods (or services) move, is thus: from China to France. On the other hand, then, the money with which these goods were purchased moves in the opposite direction: from France to China. Money moved out of France and into China.

Most countries are both importers and exporters - where they both sell goods/services to individuals in other countries as well as buy goods/services from individuals in other countries. And thus - there is a continuous movement of money: money coming into the country and money leaving the country.

If the amount of money coming in to the country and the amount of money leaving the country is equal - then international transactions have no effect on the money supply. However -

If a country's exports exceeds its imports - the money supply will go up. Why?

With exporting, money comes into the country. With importing, money leaves the country. So, if there are more goods being exported (for which money is received) than there are goods being imported (for which money is given) - then the amount of money in circulation will increase - as more money comes in than leaves the country.

The opposite then:

If a country's imports exceeds its exports - the money supply will go down. Why?

Remember - with importing, money goes out of the country. With exporting, money comes into the country. So, if there are more goods being imported (for which money is given) than there are goods being exported (for which goods are received) - then the amount of money in circulation will decrease - since more money is leaving the country than comes in.

Obviously - it's not only about the quantity of goods/services that are being exported/imported, but also about the value of these goods/services. If only a small amount of goods are being exported, but they happen to be worth a fortune - then that can amount to the same as a massive amount of some cheap commodity being exported.

3. Government Transactions

How government transactions influence the money supply is as follows:

When governments deposit government funds - for instance, from collecting taxes - with the central bank, the money supply decreases. And in the other direction - when governments withdraw funds from their account at the central bank, the money supply increases.

Secondly - when government revenue is insufficient, governments can take out loans from the central bank. Such a loan, again would increase the money supply.