Question

What is meant by the term “exorbitant privilege?” Explain completely.

I need a paragraph, thanks.

Answer 1

The word exorbitant privilege refers to the advantage that the United States has because the international reserve currency is its own currency (i.e., the US dollar). Accordingly, the US will not face a recession in the balance of payments, as it bought goods in its own currency. Exorbitant privilege as a term can not apply to currencies that have a position in the national reserve currency, only reserve currencies globally.

The Dollar is the world's reserve currency. This means it has replaced gold as the standard method of currency exchange. Let's say India and China trade with each other, for example, and as a result India owes $100 to China. Remember that India owes money to China in dollars, not in rupees! The Chinese will not in reality consider the payment in rupees. They'd consider payment only in dollars. This is because they collect the payments only. They will use the proceeds to purchase from the international markets gold, oil, and other important commodities. Because these goods are traded in dollars, all gaps in balance of payments are only settled in dollars.