Page 261 - DECO402_Macro Economics

Macroeconomic Theory Ashwani Panesar, Lovely Professional University

Notes Unit-29: Swan Model

Contents
Objectives
Introduction
29.1 Policies for Internal and External Balance: Expenditure Switching and Expenditure
Reducing
29.2 Summary
29.3 Keywords
29.4 Review Questions
29.5 Further Readings

Objectives

After studying this unit, students will be able to:
y Know the policies for internal and external balance,
y Know the expenditure switching and expenditure reducing.

Introduction

Monetary fiscal policies have definite objectives which may be obtained by use of policy equipment.
These are- full employment, economic progress, price stability, and equilibrium of balance of payment.
These objectives are often mutually opposing. Monetary and Fiscal policies study about nature of
these oppositions and about the appropriate resources between them or about establishing inter-
relation between them. Analysis of these problems has centred mainly around internal and external
objectives. Internal balance is related to income and full employment and external balance is related
to the equilibrium of balance of payment.
Theory of economic (monetary or fiscal) policy has centred around two separate problems. First,
relation between number of policy objectives and number of policy equipments; and second, allotment
of policy equipments for achieving the objectives.
John Tinbergen was the first economist who had said that number of policy equipments should be
equal to number of objectives. If as compared to policy equipments, numbers of objectives are more
then, it means that requisite tools are not there for fulfilment of policy objectives. At the other side, if
as compared to number of objectives, numbers of policy equipments are more then it means that there
is not one composition by which problem will be solved, not who knows how many combinations
are there. In this manner, it is important for the success of economic policy that number of policy
equipments is equal to number of objectives. It came to be known as Tinbergen rule or fixed target
approach.
The second problem arises that when number of policy equipments and policy objectives is same then,
how the equipments should be allotted among the targets for achieving the given objectives. In the
absence of coordination,correct value of objectives can be achieved by the rendering of distribution
problem.

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