"To achieve both internal and external balances, the authorities must use both expenditure switching and expenditure changing policies." Discuss.
In open economy macroeconomics, the stability of the system is always in jeopardy. The main objectives for policy planners in any nation are to achieve the effective combination of internal and external balance, good rates of economic growth and the unbiased distribution of income. To do this, they have devised a number of policies that can be implemented to counter anomalies. If they are successful, they will achieve long-run equilibrium for the economy. This success depends upon solving employment rates and achieving equilibrium in the balance of payments. To achieve full employment, with coinciding price stability and equilibrium in the balance of payments, policy planners have to make specific adjustments to policy. Certain policies however, are suited to meeting specific problematic conditions. In this paper, the current policies employed by economic authorities to maximize the efficiency of an economy will be evaluated and the value of expenditure switching and expenditure changing policies explored.
There is internal balance in an economy if it experiences full employment, or a rate of unemployment of no more then 5 per cent per year, with unemployment arising only in the process of changing jobs. Balance is achieved when the country's resources are fully employed and there is price level stability. In practice though there are no examples of full employment under the capitalist economic system, or any other for that matter. External balance is achieved when the current account of the balance of payments just balances. In other words, it is the condition when the country's current account has neither too large a deficit nor too large a surplus, with the general objective being to avoid an inability to repay national debts.
Internal balance is important as the under, or over utilization of an economy's resources can lead to inefficiencies and price level movements.