Analytical report Term Paper Example | Topics and Well Written Essays - 500 words

Analytical report - Term Paper Example Numerous countries in the world do not use the floating exchange rate system due to its fluctuating nature. However, in this situation, it would be best for the small country to use this system since it has more positives than negatives when it comes to growth. The recommendations in favor of this system and some of its disadvantages are discussed below. One of the main advantages of this type of system is the fact that there is an automatic balance of payment adjustments. This means that if there is disequilibrium in the balance of payments, it is normally be corrected by changes in the exchange rate system. This means that if a country has disequilibrium in the balance of payment, then it means that the currency would have to decrease in value. First of all the disequilibrium is brought forth by the fact that the exports outweigh the imports in terms of supply. Therefore, the local currency would be greatly supplied in the foreign market (Bized, 2011, para. 4). This would drive the value of the local currency down and would mean that the imports would be made more expensive and the exports cheaper. This would lead to an automatic increase in demand for the exports which would ultimately result to a balance of payment adjustment. The other main advantage of this type of system is that it frees the internal policy. This means that t he balance of payment is usually rectified when there is disequilibrium by a change in the external price of the local currency. This is as opposed to a fixed exchange rate system in which if there is disequilibrium it means that there is the need to cause a general deflationary. This deflationary could result to the general unemployment of the citizenry. The other main advantage of this type of system is that the country would be free from economic crisis but not completely as money is usually