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What are the Positive and Negative Points of Exchange-Rate Flexibility?

  • September 2014
  • Posted By Ninoslav
  • 0 Comments

Many consider flexible exchange rate as best option for business dealings. Because here market itself decides on price of the product based on its supply and demand. Exchange -rate flexibility helps traders to set price by balancing their own profit margin.
Like any other method flexible or floating exchange rate have many advantages as well as disadvantages. Here are few of them.

Advantages:
This method gives full independence to countries to set their own policy which are beneficial for its people. It has no connection with economic, political or social condition of other countries.

Flexible exchange rates help a country to achieve its goal. That definitely helps creating good economic condition in a country and also creates good employment opportunities.

Floating exchange rate promotes free trade that helps in international trade.

Fixed rate often influences the economic condition of one country with another. So fluctuation in a country will have effect in its partner country as well. Fluctuations can be easily controlled with floating exchange policies.

Disadvantages:
Exchange rate is often low elastic in international market. With low elasticity’s in import and export market exchange market becomes too unstable. This unstable condition has direct impact on international trade. International investments reduce for a long term.

Fluctuations results in change of price on the imported and exported goods which may affect a country very badly.

Even though floating exchange rates have several advantages but the same when adopted during world wars did not prove to be very successfully.

Though this method has various disadvantageous, it did not stop traders from adopting their method in doing business. Its foremost advantage is that it provides a cushion to support the economic condition of a country and the dealer itself. Who really likes to face loss due to poor economic condition of some other country?

Exchange- rate flexibility cannot be ignored. It has become an integral part of most international trade and business. You must know “What are different types of exchange- rate regime?

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