external balance

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A sustainable pattern of transactions with the rest of the world. With no capital movements, in a static economy external balance requires a zero balance of payments on current account, since otherwise foreign exchange reserves would become exhausted if there was a current account deficit, and would expand without limit if there was a current account surplus. Without capital movements a growing economy which needs to add to its foreign exchange reserves requires a current account surplus just sufficient for this purpose. With capital movements, external balance means that these are at a sustainable level, at least in the medium run. In an economy with good domestic investment opportunities and low savings, capital inflows and a current account deficit could represent external balance. Conversely, in an economy with high savings and poor domestic investment opportunities, capital outflow and a current account surplus could represent external balance. See also internal balance.

Subjects: Economics.

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