n be further divided into two forms: clean or dirty floating. Clean floating refers to a rate in which the central bank does not intervene to affect theexchange rate. Dirty floating, which is more commonly practiced than clean floating,involves intervention from the central bank to influence the exchange rate. One of theadvantages of a floating exchange rate is that although an internal crisis is possible, therewill never be a foreign exchange crisis.4IV. TRADE PROBLEMSDefinition of Trade ProblemsAs mentioned earlier, when the Bretton Woods system failed, the United Statesestablished a floating exchange rate, although many economists feared that a floatingrate would be harmful to the operation of international trade. A floating rate was viewedas highly unstable and it was thought that the indirect effects of this instability wouldlimit stimulation of trade. Without stability in trade, the supply and demand required tokeep the rate at equilibrium would be disrupted and create an exchange crisis. Trade Problems as a Result of the Exchange RateThe exchange rate creates a problem in trade when a currency becomes overvalued,either as a result of the inflation rate remaining higher than that of its trading partner, orbecause the currency to which it is adjusted is rising and dragging the lower currency up. This overvalue leads to poor comptetitiveness - resulting in a loss of trade. In 1998,United States exports declined in almost all product groups, including agricultural items,industrial materials, capital goods, and even exports of services. To compound thisproblem, the U.S. experienced an increase in the number of imports. These two factorsare crucial when explaining the U.S. trade deficit; however, the shifting of exchange rateshas also played a part in the erosion of the United States competitivness in the globaleconomy. In light of these problems, the dollar still remains strong. Trade problems are not only aresult of situat...
