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Exchange Rates: Advantages of Floating Exchange Rate

Floating exchange rates have the advantages of being determined by market forces without government intervention and not requiring large currency reserves. However, they can fluctuate greatly, making planning difficult for firms. Fixed exchange rates provide less volatility and uncertainty but require large reserves and may cause dramatic devaluations if not maintained. Free trade allows specialization and access to resources, lowering prices and increasing choice for consumers, while tariffs can protect infant industries, jobs, and prevent dumping of goods but also generate government revenue and avoid balance of payments deficits.

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20 views

Exchange Rates: Advantages of Floating Exchange Rate

Floating exchange rates have the advantages of being determined by market forces without government intervention and not requiring large currency reserves. However, they can fluctuate greatly, making planning difficult for firms. Fixed exchange rates provide less volatility and uncertainty but require large reserves and may cause dramatic devaluations if not maintained. Free trade allows specialization and access to resources, lowering prices and increasing choice for consumers, while tariffs can protect infant industries, jobs, and prevent dumping of goods but also generate government revenue and avoid balance of payments deficits.

Uploaded by

sannnnn
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Exchange Rates

Advantages of floating exchange rate:


·      rate determined continually through market forces, so the gov. doesn’t have to intervene 

·      there is no need to hold large amounts of reserves 

·      government is not committed to maintain a particular external value of the currency, so it


can focus on other objectives 

Disadvantages of floating:
·      can fluctuate a great deal and this volatility can make it very difficult fir firms to plan ahead
there can be speculative pressures on the currency.

Advantages of fixed exchange system;

·      less volatility in exchange rate , so less instability


·      makes planning and forecasting easier and so less uncertainty
·      could encourage investment and trade = positive effect on economy
·      avoids speculative movements in exchange rates

Disadvantages of fixed exchange system:


·      requires government to hold large amounts of reserves
·      if the rate is not maintained, there will be a dramatic change in value through devaluation 

Advantages of free trade:


·      goods bought between countries without any restrictions
·      every country will produce what it is best at producing and allow efficient allocation of
resources . this will result in higher output, employment and living standards.
·      firms will be able to exploit comparative advantage 
·      firms will have more access to raw materials
·      firms will enjoy advantages of economies of scale . this will encourage competition and
result in lower prices + more choice for consumers.

Reasons to impose tariffs:


·      to protect infant industries from foregone competition. tariffs will do this by restricting
imports 
·      free trade may force domestic firms out of businesses. tariffs will help jobs be generated in
domestic country
·      prevents forgone country’s from dumping their goods in the country. dumping occurs when
firms deliberately sell their goods at very low price to domestic country in order to drive the
domestic firms out.
·      tariffs great source for government revenue
·      tariffs will avoid deficit in BOP. Deficit occurs when imports more than exports
·      tariffs will safeguard the country from being too dependent on others

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