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Pauline F.

Internal balance

A situation in which the consumption in an economy roughly equals

production. That is, internal balance occurs when what is spent and what is
produced in the economy are never too far from being even.
Internal balance may be characterized by both full employment and low
inflation, though not all economists believe this is possible. Maintaining
internal balance is considered sustainable.
Internal balance is a situation where the economy is operating at full
employment and the general level of prices is constant (price stability).
The achievement of full employment and price stability are two important
macroeconomic objectives of the government. In practice, it is difficult to
secure both objectives simultaneously

External balance

A situation in which the money a country brings in from exports is roughly

equal to the money it spends on imports. That is, external balance occurs
when the current account is neither excessively positive nor excessively
An external balance implies capital movement. That is, a country needs to
have both imports and exports to maintain an external balance; it is not
sufficient simple to note no balance by not buying and selling goods.
An external balance is considered sustainable
External balance is a situation of balance of payment equilibrium that, over a
number of years, results in a country spending and investing abroad no more
than other countries spend and invest in it.
The achievement of external balance is one of the macroeconomic objectives
of the government.

Internal balance in economics is a state in which a country maintains full

employment and price level stability. It is a function of a country's total output,
Ii = c (yf - t) + i + g + ca (e x p*/p, yf-t; yf* - t*)
Internal balance = consumption [determined by disposable income] + investment +
government spending + current account (determined by the real exchange rate,
disposable income of home country and disposable income of the foreign country).
External balance signifies a condition in which the country's current account, its
exports minus imports, is neither too far in surplus nor in deficit. It is signified by a
level of the current account which is consistent with the maintenance of existing (or
growing) levels of consumption, employment and national output over the long
term. It is notated by
Xx = ca (ep*/p, y-t, yf* - t*)
External balance = the right amount of surplus or deficit in the current account.
Maintaining both internal and external balances requires use of both monetary
policy and fiscal policy. That is one reason why floating exchange rates may be

Pauline F. Dacir
superior to fixed exchange rates. Under fixed exchange rates, governments are not
usually free to employ monetary policy. Under floating rates, countries can use both.
What is 'fiscal deficit'

A fiscal deficit occurs when a government's total expenditures exceed the

revenue that it generates, excluding money from borrowings. Deficit differs
from debt, which is an accumulation of yearly deficits.
A fiscal deficit is regarded by some as a positive economic event. For
example, economist john maynard keynes believed that deficits help
countries climb out of economic recession.
On the other hand, fiscal conservatives feel that governments should avoid
deficits in favor of a balanced budget policy.

Definition of balanced budget:

when total government spending equals (or is greater than) government tax
Usually, governments have a political incentive to spend more money than
they actually have. This leads to a budget deficit because they need to
borrow from the private sector. However, if the government increase taxes
then they might be able to balance the budget.