INTERNAL AND EXTERNAL BALANCE — PROBLEMS OF INTERPRETATION

The literature discusses “internal balance” and “external balance” (hereafter labelled IB and XB respectively) as if they are clearly defined concepts. If an economy is to achieve IB or XB or both then it must know what it is trying to achieve! In addition, this begs the question of precisely who it is that is achieving the stated objectives. Is it the government? Is it some decentralised decision unit, like the Treasury or the Bank of England? Furthermore what has been said so far presupposes that IB and XB are definitely objectives rather than constrainsts. If we suppose for the moment that XB means balance of payments equilibrium (yet to be defined), then some would argue that this is not an objective but rather a constraint. We shall not enter this debate here and treat XB as an objective.