This imported capital has been very important in the world's development process, and it has often brought with it other benefits, such as the international spreading of technological improvements. Without world capital flows, the general level of development in the world would be far less. It turns out that there is some fine print that goes with the neoclassical model, and the world economy has had some trouble with the fine print. Here are some of the ways. Exchange rate volatility.
Countries trade in different currencies, and exchange rates are necessary to make the conversions.
But in addition to being the devices for converting currencies, exchange rates play another important role in the world economy - they also represent the mechanisms for bringing countries price structures in line in international trade. Suppose one country's prices are too high for it to compete in world trade, either because it has suffered an adverse trade shock, has had too much inflation, has too rigid labor contracts, or for some other reason. The country can suffer a painful recession to get its prices back in line. Or it can let its currency depreciate. Depreciations are not absolutely necessary, as is asserted by advocates of fixed exchange rates.