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Swan Diagram

Here we define internal and external balances in the economy. We will use the Swan Diagram to identify imbalances and analyze macroeconomic policies to address those imbalances. Internal balance is characterized by full employment, meaning, the economy is operating at its full potential and inflation is stable. External balance requires equilibrium in the balance of payments. Or, it is a situation in which the current account position can be sustained by capital flows (For example a current account deficit can represent equilibrium if it is reasonable to expect that the capital inflows necessary to finance it are sustainable.)