Page 262 - DECO402_Macro Economics

Unit-29: Swan Model

Notes

Notes Monetary fiscal policies have definite objectives which may be obtained by use
of policy equipments.

Policies for Internal and External balance: Expenditure Switching and
Expenditure Reducing

Johnson only has pointed towards policy equipments for bringing both internal and external balance.
He named them expenditure reducing or internal policy and expenditure switching or external
policy.
Deficit in balance of payment means excess of expenditure over income. For correcting it, similarity
should be brought in income and expenditure. Objective of expenditure reducing policies is to
reduce all demand by the medium of more taxes and interest rates, by which expense and production
reduces. Further, fall in income and expenditure reduces domestic price level. By this there is a
change in expenditure on domestic goods from foreign goods. As a result imports of the country
reduce. Objective of expenditure switching policies is to increase the demand for domestic goods
and to switch the expenditure from imported goods to domestic goods. Such expenditure switching
increases domestic production. Until the extreme tendency of spending is less than the unit, it will
improve the equilibrium of payment balance of the country.
For simultaneously achieving objectives of both
internal and external, a judicious combination of
expenditure reducing and expenditure switching
equipments is necessary. For e.g. if economy is at
full employment level then because of the policy of
devaluation there may be inflation in the economy.
That is why for maintaining balance of payment
equilibrium and full employment along with the
expenditure switching policy of devaluation, there
must be more expenditure reducing policies of
monetary and fiscal control.
Relation between policy equipments for
simultaneously obtaining both objectives of internal
and external balance has been analysed in form of
Trevor–Swan model as described in figure 29.1. Figure 29.1

Self Assessment
Fill in the blanks:
1. Fall in Production and expenditure reduces ______ price level.
2. Deficit in balance of payment means excess of ______ over income.

The Swan Model

Swan investigates appropriate combinations of expenditure reducing and expenditure switching
policies for achieving internal and external balance.

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