Written by the Fiveable Content Team • Last updated September 2025
Written by the Fiveable Content Team • Last updated September 2025
Definition
Forex, short for foreign exchange, is the global market for the trading of different national currencies against each other. It is the largest and most liquid financial market in the world, with trillions of dollars in daily trading volume.
5 Must Know Facts For Your Next Test
Forex trading allows investors to profit from changes in the relative values of different currencies.
The forex market is open 24 hours a day, 5 days a week, and is decentralized, with transactions occurring over-the-counter.
Major participants in the forex market include banks, commercial companies, central banks, investment management firms, hedge funds, and retail investors.
The most commonly traded currency pairs are the major pairs, such as EUR/USD, USD/JPY, GBP/USD, and USD/CHF.
Forex trading is highly leveraged, allowing investors to control large positions with a relatively small amount of capital.
Review Questions
Explain how the forex market is used to compare GDP among countries.
The forex market plays a crucial role in comparing GDP among countries by providing the exchange rates needed to convert and compare the economic output of different nations. The relative value of a country's currency, as determined by the forex market, directly impacts the purchasing power and international competitiveness of its goods and services, which are key factors in calculating and comparing GDP across countries.
Describe how demand and supply shifts in the forex market can impact the relative values of currencies.
Changes in the demand and supply of currencies in the forex market can lead to shifts in exchange rates. For example, if there is an increase in the demand for a particular currency, such as the U.S. dollar, its value will rise relative to other currencies. Conversely, if the supply of a currency increases, its value will decrease. These demand and supply shifts in the forex market directly affect the relative values of currencies, which can have significant implications for international trade, investment, and the comparative analysis of economic indicators like GDP.
Evaluate the role of the forex market in the global economy and its impact on the measurement and comparison of economic performance across countries.
The forex market is a critical component of the global financial system, facilitating the exchange of currencies needed for international trade, investment, and the comparison of economic indicators like GDP across countries. By determining exchange rates, the forex market allows for the conversion and comparison of the output and purchasing power of different national economies. Fluctuations in exchange rates, driven by shifts in the demand and supply of currencies, can significantly impact the relative competitiveness of a country's goods and services, as well as the valuation of its economic performance. Therefore, the forex market plays a vital role in the measurement and analysis of economic activity and performance on a global scale.