General Equilibrium Model Swana - International Economics

General Equilibrium Model Swan

Simultaneous provision of internal and external equilibrium of the economic system is one of the main problems of macroeconomic analysis in an open economy.

■ Internal equilibrium - the state of the country's economy, which ensures that the aggregate demand and aggregate supply are consistent with full employment and no inflation.

■ External Equilibrium - balance of current account of the balance of payments.

We will focus on the flow of goods and services.

Obviously, to ensure internal and external balance, the government of the country can use the tools of both fiscal policy, changing, for example, public spending G, and monetary policy, resorting, in particular, to a change in the real exchange rate r * national currency. Naturally, for the simultaneous achievement of both types of equilibrium, the mechanisms of fiscal and monetary policy should be carefully coordinated.

Let's consider a methodological device that allows such coordination using the Swan diagram (Figure 6.7).

In this case, the graph of internal equilibrium (full employment) has a downward character. This is because if the economic system is on line I (for example, at point A), then the increase in government spending G will lead to an increase in national production and excess employment (point B). To restore internal balance under these conditions, the real appreciation of the national currency should occur (decrease r *) due to, for example, revaluation of the national currency (transition to point C).

It follows that the area of ​​the Swan diagram, located above (to the right) of the internal equilibrium graph, corresponds to

The general equilibrium model is Swan: 1 - the graph of internal equilibrium, 2 - the graph of external equilibrium

Fig. 6.7. The general equilibrium model is Swan: 1 - the graph of internal equilibrium; 2 is the graph of external equilibrium

inflationary demand and excess employment. The same part that is located lower (to the left) of this chart, characterizes the excessive supply and part-time employment.

Line 2 corresponds to the external equilibrium of the economic system with a zero current account balance. Its upward character can be explained by the fact that the growth in the volume of national production and surplus employment, caused by the increase in government spending (the transition of the system from point D to point E), will cause a corresponding reduction in net exports of XN, i.e. current account deficit. To restore the external equilibrium under these conditions, it is necessary to devalue the national currency, which will cause the depreciation of the real exchange rate (growth r *) and the achievement of a zero current account balance. The economic system will move in this case from the point E to the equilibrium point F.

Thus, the diagram area above (to the left) of line 2 will correspond to the current account surplus, and the area below (to the right) is its deficit.

The intersection point of the graphs of internal and external equilibrium (point O) means that the situation is reached when internal -

It, and the external equilibrium. Any movement away from the point O means violation of one or both equilibria. In particular:

- area I corresponds to the negative balance of the current account and underemployment;

- area II - current account deficit and inflationary demand;

- area III - current account surplus and inflationary demand;

- area IV - the positive balance of the current account and part-time employment in the economic system.

Thus, the Swan diagram clearly illustrates how a general equilibrium can be achieved if the exchange rate is used as one of the instruments of macroeconomic regulation. For the practical solution of this problem and the choice of a package of concrete measures for macroeconomic regulation of the economic system, as a rule, thorough statistical studies are carried out, with the help of which the degree, nature, and peculiarities of the individual levers influence are revealed, and their influence together with other factors is modeled so as to reach the most acceptable options for economic policy.

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