Discuss the concepts of internal and external balances and what floating exchange rates can do to a country's economyTopic ReviewWhen referring to the internal balance these are the objectives of the economy related to full employment or a case of normal production and low inflation, i.e. prices are stabilized. In a situation of overemployment the prices of materials increase while in case of underemployment the prices decrease. When unexpected inflation occurs, the country has difficulty planning for the future and a case of income redistribution between traders and investors occurs. External balances refer to the equilibrium of the trade balance. This means the balance between the current and capital accounts of the country. External balances occur when the payment transactions involved bring the trade balance to zero (Anonymous, 1870-1973). Floating exchange rate is the case where the country's currency is determined by the foreign exchange market through supply and demand on the Forex market. In this case the value of the currency, also called floating currency, changes depending on the foreign exchange market (McBrewster 'et al', 2010). DiscussionHistory has shown that it is not possible for a country to maintain internal and external balances which derives from the thesis that countries with low labor productivity cannot maintain stable price levels. The problem of low growth rate, labor productivity in the sector and poor foreign trade relations lead to an increase in external imbalance. Competition between the demand for domestic products and the export of raw materials also leads to an increase in the imbalance. It is clear that increasing labor productivity translates into an increase in economic growth and that positive growth in labor productivity occurs through the export of raw materials. The issue of monetary balance affects internal and external trade balances (Columbus, 2004). The exchange rate refers to the price of one currency relative to another. In the floating exchange rate these prices are determined by the foreign market which fluctuates occasionally. Fluctuating exchange rates have a great impact on a country's economy and this could trigger its stability or instability. There is an automatic adjustment in case a country has a larger payments deficit leading to a continuous outflow of currency from the country. The floating exchange rate allows the government to determine interest rates and this allows the economy to expand as the country will charge interest depending on the price of the currency. Since currency changes randomly, exchange rates also vary from time to time and thus can lead to a point of economic instability (McBrewster 'et al’, 2010).