- Internal balance
Internal balance in
economics is a state in which a country maintainsfull employment andprice level stability . It is a function of a country's total output,:II = C (Yf - T) + I + G + CA (E x P*/P, Yf-T; Yf* - T*)
:Internal balance = Consumption [determined by disposable income] + Investment + Government Spending + Current Account (determined by the real exchange rate, disposable income of home country and disposable income of the foreign country).
External balance signifies a condition in which the country's
current account , its exports minus imports, is neither too far in surplus nor in deficit. It is signified by a level of the current account which is consistent with the maintenance of existing (or growing) levels of consumption, employment and national output over the long term. It is notated by:XX = CA (EP*/P, Y-T, Yf* - T*)
:External balance = the right amount of surplus or deficit in the current account.
Maintaining both internal and external balances requires use of both
monetary policy andfiscal policy . That is one reason whyfloating exchange rate s may be superior tofixed exchange rate s. Under fixed exchange rates, governments are not usually free to employ monetary policy. Under floating rates, countries can use both.
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