"A flexible exchange rate is the one in which the foreign exchange rate is determined by the market forces of supply of and demand for foreign exchange".
In the freely floating exchange rate system, there is no invention on the part of the government of the country to determine the exchange rates. The government is on the sideline. It allows the foreign exchange market to determine the exchange rate by the forces of supply and demand for the foreign currency. We can say that in the flexible exchange rate system, the exchange rates fluctuate in response to market forces.
The disequilibrium in the balance of payments in automatically adjusted in the freely floating exchange rates. For example,
Pakistan has an excess import from France. Pakistani's import will naturally buy francs to pay their imports. The price of francs will be driven up bin terms of Pak rupee. The French goods become more expensive to Pakistani's. The goods produced in Pakistan become cheaper to France. The export from France to Pakistan begins to rise. The French purchases will continue till the exports and imports between the two countries are restored to balance. We thus, find that the freely floating exchange rates tend to automatically correct disequilibrium in the balance of payments at the international level.
In the freely floating exchange rate system, there is no invention on the part of the government of the country to determine the exchange rates. The government is on the sideline. It allows the foreign exchange market to determine the exchange rate by the forces of supply and demand for the foreign currency. We can say that in the flexible exchange rate system, the exchange rates fluctuate in response to market forces.
The disequilibrium in the balance of payments in automatically adjusted in the freely floating exchange rates. For example,
Pakistan has an excess import from France. Pakistani's import will naturally buy francs to pay their imports. The price of francs will be driven up bin terms of Pak rupee. The French goods become more expensive to Pakistani's. The goods produced in Pakistan become cheaper to France. The export from France to Pakistan begins to rise. The French purchases will continue till the exports and imports between the two countries are restored to balance. We thus, find that the freely floating exchange rates tend to automatically correct disequilibrium in the balance of payments at the international level.
