Internal Balance

3 Key excerpts on "Internal Balance"

• 

  eBook - ePub

  Collected Papers James Meade V1

  • Susan Howson(Author)
  • 2013(Publication Date)
  • Taylor & Francis

    (Publisher)

  The Balance of Payments was essentially based on macro-economic models of this kind. What I tried to elaborate was the international interplay between a number of national economies of this Keynesian type. For this purpose I discussed the different combinations of policy variables which would serve to reconcile what I called ‘external balance’ with what I called ‘Internal Balance’. By ‘external balance’ was meant a balance in the country's international payments; and although this idea presents, and indeed at the time was realised to present, considerable conceptual difficulties, nevertheless I still instinctively feel that it is not a foolish one. But can the same be said of the idea of ‘Internal Balance’? Does it mean full employment or does it mean price stability?

  I don't believe that I was quite so stupid as not to realise that full employment and price stability are two quite different things. But one treated them under the same single umbrella of ‘Internal Balance’ because of a belief or an assumption that if one maintained a level of effective demand which preserved full employment one would also find that the money price level was reasonably stable. The reason for making this tacit or open assumption was, of course, due to a tacit or open assumption that the money wage-rate was normally either constant or at least very sluggish in its movements. In this case with the Keynesian model the absolute level of money prices would be rather higher or lower according as the level of effective demand moved the economy to a higher or lower point on the upward-sloping short-period marginal cost curve. But there would be no reason to expect a rapidly rising or falling general level of money prices in any given short-period equilibrium position.

  This may have been a very sensible assumption to make in the 1930s. It is more doubtful whether it was a sensible assumption to make in the immediate post-war years when The Balance of Payments

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  eBook - ePub

  Balance of Payments

  Theory and Economic Policy

  • Robert Stern(Author)
  • 2017(Publication Date)
  • Routledge

    (Publisher)

  D —, to obtain external balance, the inflationary pressure and recession would be made worse in the respective countries.

  Row (3) thus stands in marked contrast to all the other possible cases in which the countries acting on their own will be able either to remove the existing imbalances completely or reduce them to a smaller magnitude of the row (3) type. So long as an increased external imbalance cannot be financed due to a lack of international monetary reserves, countries are reluctant to expose themselves to added inflationary pressure or deflation, and there is a constraint on the use of exchange-rate adjustment or restrictions on trade and payments, row (3) is apparently a policymaker’s nightmare.

  Inflation, Unemployment, and External Balance2

  We have already mentioned that it may be an oversimplification to treat the attainment of Internal Balance in terms of zero unemployment and perfect price stability. Rather, the situation, especially in the advanced industrialized countries, is one in which price inflation and unemployment may coexist. The policy problem is therefore one of seeking a tradeoff between socially acceptable levels of inflation and unemployment that are in turn consistent with the objective of external balance.

  To elucidate, consider Figure 10.1 in which we depict a Phillips curve, PP , that shows the tradeoff assumed to exist between the rate of inflation (measured vertically) and the unemployment rate (measured horizontally). Also shown are curves

  I0 , I1

  and

  I2

  that reflect the preferences of the policymakers with regard to inflation and unemployment. These latter curves are indifference curves. That is, each curve represents the combinations of inflation and unemployment that are equally acceptable to the authorities. Curves that lie closer to the origin are preferred to those lying further out. Thus, for example, each unemployment rate is associated with a lower rate of inflation along

  I0

  than along

  I1

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  eBook - PDF

  An Introduction to International Macroeconomics

  A Primer on Theory, Policy and Applications

  • Graham Bird(Author)
  • 2017(Publication Date)
  • Red Globe Press

    (Publisher)

  EB and IB divide the diagram into a number of regions. To the right of EB there will be a payments deficit since with a given cost ratio, domestic demand has expanded, whilst to the left of EB there will be a payments surplus. To the right of IB there will be inflation since again with a given cost ratio there is greater domestic demand, whilst to the left there will be unemployment. The appropriate policy mix will not be determined by the region in which the economy is located but by the economy’s location within a region. Drawing in the horizontal and vertical lines through the point of intersection between IB and EB , it may be seen that whereas, for example, both point M and point N indicate a deficit and unemploy-ment, at M the appropriate policy is an improvement in the cost ratio and an increase in real demand, while at point N it is an improvement Appendix STABILISATION POLICY IN AN OPEN ECONOMY 123 in the cost ratio and a decrease in real demand. Swan thus demonstrates that signals in the form of surpluses, deficits, inflation and unemploy-ment may give a misleading guide to policy-makers. This approach provides us with a broad treatment of internal–external balance, since the analysis is no longer restricted to monetary and fis-cal policy. Although there remain basically two instruments in the form of demand management and cost ratio adjustment, these general instruments incorporate a whole range of subinstruments. Demand management, for example, may be conducted through both fiscal and monetary policy, whilst the cost ratio may be influenced inter alia by exchange-rate alteration, incomes policy, and competition policy. In this respect the policy choice available to policy-makers is more accur-ately stated. Qualifications to the Swan treatment of the problem of internal– external balance include the fact that retaliatory action is again assumed away.

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