Concepts of internal and external balances and what floating exchange Essay

Concepts of internal and external balances and what floating exchange rates can do to a country's economy - Essay Example This essay discusses internal and external balances and what floating exchange rates can do to a country’s economy. The internal balance of an economy is a situation where the level of activity is consistent with a stable rate of inflation (Enotes, 2009). A good level of business activity within an economy is necessary to provide a health job marketplace that allows an economic system to keep its unemployment rate low. Inflation must be maintained at a stable level in order to ensure that the participants of the economy are able to retain a monetary unit with consistent purchasing power. For example in an economy with a high inflation rate of 25% the people are losing 1/4th of their money if keep the money at home because the currency is depreciating at an accelerated pace. High inflation creates chaos in an economic because people panic and purchased faster than normal which drastically increases the level of economic activity in a system. The purpose of the external balance of an economy is to keep the flows of money in to and out of the country roughly balanced over a period of years (Bized, 2009). The import and export activity of a country determine the external balance position of a nation. If the imports are higher than the exports the country will have a negative external balance. On the other hand if the exports of a nation are higher than their imports the country has a positive external balance. One of the basic rules of macroeconomic policy concerning external balance is that the position must be sustainable and manageable in the medium term. A medium term in economics refers to a period between 1 to 5 years. The United States of America has the worst external balance of any nation in the world. The external balance of the US as of the year 2004 was negative $624 billion (Nationmaster, 2004). It does not seem that Americans are following the medium range sustainable balance universal economic policy.