Answer: The answer is there is a connection between floating rate system and trade balance.
Explanation:
Floating exchange rate can be said to be a situation in which the exchange rate is allowed to move freely in response to the forces of demand and supply.The higher the demand for the currency the lower the supply for the currency. The higher will be the value of such currency in terms of other currency, a currency is demanded for the purchase of goods and services and for the purpose of investment. The investment we are talking about may be a long term investment or a short term investment. For example when a foreign company build a factory for the production of goods in another foreign countries.
The exchange rate in a free market economy is determined by the interaction of demand and supply. Demand for a particular currency is an indication of the export for the goods and services produced in such a country,in the sense that people that want to buy the export goods of a country will need the country currency to do so. On the other hand, the supply of a country's currency is determined by the amount of import of a country as the country's importers need to change their local currency to a foreign currency to be able to import foreign made goods into their country. For example if a Nigerian importer wants to import goods from United States to Nigeria such an importer will have to change the Nigerian Naira to United States dollar to be able to import such goods because payments for such a goods will be done in dollars.
The floating exchange rate help to adjust trade imbalance, in the sense that a country will import goods from a particular country in spite of their local production in other to ensure that the country other countries continues to purchase the country goods. A country can also use a floating exchange rate to keep inflation rate low when a country import goods that they can produced locally if their cost of Production is cheaper abroad than in their home country.this will ensure that the prices of the goods will be affordable for the consumers to buy, because the prices of such goods will be low.
