Balance

Background

In economics, the term “balance” has various applications and meanings, often denoted in the context of external, internal, and invisible balances. The balance can represent an equilibrium state or a specific measurement within economic accounts.

Historical Context

Historical examination of balance in economics can trace back to the mercantilist era, where understanding the balance of trade video crucial. Classical and neoclassical economists further refined these concepts, introducing notions of internal and external balances within economies.

Definitions and Concepts

External Balance: This refers to a country’s balance of payments, encompassing the trade balance (exports vs. imports) along with financial and capital accounts.

Internal Balance: This relates to a situation in which a country achieves both full employment and price stability internally within its economy.

Invisible Balance: This signifies the balance of non-tangible transactions or “invisibles” in the balance of payments, such as services, transfers, and income.

Major Analytical Frameworks

Classical Economics

In classical economics, balance primarily focused on the balance of trade, considering the accumulation of gold and silver as an essential indicator of economic prosperity and power of a nation.

Neoclassical Economics

Neoclassical economics adopted a more nuanced understanding of balance. Here, econometric models accounted for the balance of payments, incorporating factors like capital flows, foreign exchange markets, and international investments.

Keynesian Economics

Keynesian economics introduces the concepts of internal balance connected to employment, and output levels balancing aggregate demand and supply. External balance remains significant for maintaining stable growth without leading to long-term trade deficits or surpluses.

Marxian Economics

Marxian economics considers balances in terms of capital flows and economic equilibrium, emphasizing class struggle and distribution factors over pure numerical balances within economic transactions.

Institutional Economics

Institutional economics would focus on the structures and norms influencing economic activity, affecting how balances are maintained through regulations, practices, and collective arrangements.

Behavioral Economics

Behavioral economics seeks to understand how psychological factors impact economic decisions, which in turn affect economic balances. For instance, consumer confidence significantly influences internal economic activities and balances.

Post-Keynesian Economics

Post-Keynesian economics delves into monetary and financial stability, often analyzing how market imperfections and regulatory frameworks need adjustments to achieve internal and external balances.

Austrian Economics

Austrian economics focuses on the importance of equilibrium emergent from individual actions but often critiques the concept of balance due to economic dynamism and continual change inherent in entrepreneurial activities and market actions.

Development Economics

Development economics examines how developing nations manage their internal and external balances, particularly concerning trade balances, foreign aid, and investment flows crucial for economic development.

Monetarism

Monetarism ties the notion of balance tightly to control of the money supply and its impact on inflation and overall economic stability. Balances, in this framework, guide policy decisions to maintain price stability and avoid inflationary imbalances.

Comparative Analysis

These frameworks all converge on the notion that achieving balance, whether internally or externally, helps promote long-term economic stability and growth. However, approaches and implementation strategies differ, reflecting underlying theoretical insights and policy recommendations.

Case Studies

U.S. Trade Balance During 2000-2020: Examination of shifts in the U.S. trade balance, its effects on economic policy, and subsequent domestic impacts.
Eurozone and Balance of Payments Crises: Analysis of balance of payments in European countries during the Eurozone crisis, emphasizing internal vs. external imbalances.
China’s Economic Expansion: Investigating how China manages its internal balance in the face of rapid industrialization and significant external trade surpluses.

Suggested Books for Further Studies

“International Economics” by Paul Krugman and Maurice Obstfeld
“Macroeconomics” by N. Gregory Mankiw
“The Balance of Payments: Theory and Economic Policy” by Marion G. Rich

Trade Balance: The difference between a country’s exports and imports of goods and services.
Balance of Payments: A comprehensive statement that summaries a country’s economic transactions with the rest of the world over a specific period.
Current Account Balance: A component of the balance of payments which includes trade balance, net primary income, and secondary income.
Fiscal Balance: The difference between a government’s total revenues and its total expenditures.