Flexible exchange rate system:
A country is linked to other countries through two broad channels: trade flows andfinancial flows. Trade flows pertain to movement of goods and services betweencountries and thus facilitate exchange of products between countries, commonlyknown as exports and imports. When countries produce more than what they candomestically consume, they export. Similarly, when countries consume more than whatthey can produce, they import.Thus, there would be balancing of production surpluses and deficit when trade takesplace between countries.The implications of the above formulations, (i.e., trade flows) on the components ofaggregate demand (AD) would be to include net exports [i.e., exports(X) - imports(M)] such that
AD = C + I + G + X - M
where,C: Consumption
I:Investment
G: Government Expenditure
S: SavingsThis would mean that