I. Introduction
A. Definition of freely floating exchange rates
B. Explanation of inflation differentials and their impact on exchange rates
C. Overview of the essay's focus on how higher domestic inflation affects exchange rates in a freely floating system

II. Understanding Freely Floating Exchange Rates and Inflation
A. Definition and characteristics of a freely floating exchange rate system
B. Explanation of inflation as a measure of rising prices and falling purchasing power
C. Discussion of how inflation differentials arise among trading partners

III. Effects of Higher Domestic Inflation on Imports and the Exchange Rate
A. Analysis of the relationship between higher domestic inflation and increased demand for imports
B. Explanation of the exchange of domestic currency for foreign currencies to pay for imports
C. Discussion of the impact of increased supply of the domestic currency on the exchange rate

IV. Effects of Higher Domestic Inflation on Exports and the Exchange Rate
A. Analysis of the relationship between higher domestic inflation and decreased demand for exports
B. Examination of how higher domestic inflation affects the competitiveness of exports
C. Discussion of the impact of decreased demand for the domestic currency on the exchange rate

V. Real-World Examples and Data
A. Presentation of historical examples or case studies illustrating the impact of inflation differentials on exchange rates
B. Inclusion of relevant data or economic indicators supporting the relationship between inflation differentials and exchange rates

VI. Conclusion
A. Summary of the main points discussed in the essay
B. Emphasis on the importance of maintaining competitive inflation rates for exchange rate stability
C. Closing thoughts on the significance of understanding the impact of inflation differentials on exchange rates in a freely floating system

Note⬅: This is a general outline to provide structure for your essay. You can expand each section with relevant examples, evidence, and analysis to further develop your arguments and support your ideas.