Advantages and disadvantages of exchange rates

The exchange rate is the rate at which the currency is traded. There are two types of currency exchange rates:

Floating exchange rate

Fixed exchange rate

The floating rate is a market-driven value for a currency determined by the free market power of demand and supply without government or central bank intervention. The floating exchange system consists of an independent floating system and a managed floating system. Where before the exchange was strictly determined by the free movement of demand and supply. In some cases it may be managed by the central bank to reduce daily fluctuations and is called a managed floating system. If the demand for money decreases or the supply increases, the rate of change will decrease and if the demand increases or the supply decreases, it will appreciate.

For a stable system, the government is reluctant to allow the country’s currency to float freely, and they suggest a level where the exchange rate will remain. The government takes whatever measures are necessary to maintain the rate and avoid fluctuations. There are two methods by which prices can be applied for the value of fixed and pegged coins.

In the shadow of a fixed system, sometimes a reduction in the rate is called a revaluation. An increase in the exchange rate is called devaluation. A devaluation at a certain rate would increase the current account balance, make a country’s exports less expensive for foreigners, and discourage imports by making imported goods more expensive for domestic consumers. This leads to an increase in trade surplus or a decrease in trade deficit. A revaluation of the reverse will occur.

Floating systems have the following advantages and disadvantages

The floating system has automatic correction because the country simply lets it go liberally to balance supply and demand.

রয়েছে There are restrictions from external economic events because the currency of a country under a certain system is not bound by the potential high world inflation rate.

Free movement of demand and supply provides a shield to the domestic economy from global economic fluctuations

• Companies cannot predict future rates and this adds to the uncertainty.

It leaves the international competition for a country’s products in a market that is often affected by speculative money flows;

Stable systems have the following advantages and disadvantages

There is assurance in a stable system. This makes international trade and investment less risky.

There is little or no speculation in a particular system.

The static system opposes the purpose of the free market and it is not able to handle the push as fast as the floating system.