Concept of International Liquidity

Concept of International Liquidity

International liquidity means the resources or the reserves at the disposal of the various countries of the world, for settling trade and other imbalances in the international sphere. It is common knowledge that a country’s international transactions on current account are rarely in balance, i.e., the total value of exports of goods and services and the total value of imports of goods and services are seldom equal.

Components of International Liquidity

Under the present international monetary system, which is undergoing a severe crisis in recent years, the total liquidity or reserves at the disposal of a country consists of (a) the gold reserves of the national monetary authorities with the central bank, (b) holdings of the key currencies acceptable internation­ally, i.e., the U.S. dollar and the U.K. pound sterling, and (c) l.M.F. reserve position which represents the drawing potential of the l.M.F. countries. Out of these three components of international liquidity, the holdings of gold and dollar are more important in determining the extent of liquidity. It means that the supply of international liquidity is linked with the supply of gold, and the dollar which in turn is a function of the external balance, i.e., the balance of payments position of the U5A vis-a-vis the rest of the world.

It has been argued by many economists that in the present times, the amount of international liquidity at the disposal of the countries of the world especially of developing countries is quite inadequate.