The Swan Diagram, 233x233px In

economics Economics () is the social science that studies the production, distribution, and consumption of goods and services. Economics focuses on the behaviour and interactions of economic agents and how economies work. Microeconomics anal ...

, a Swan Diagram, also known as the Australian model (because it was originally published by

Australia Australia, officially the Commonwealth of Australia, is a sovereign country comprising the mainland of the Australian continent, the island of Tasmania, and numerous smaller islands. With an area of , Australia is the largest country by ...

n economist Trevor Swan in 1956 to model the Australian economy during the

Great Depression The Great Depression (19291939) was an economic shock that impacted most countries across the world. It was a period of economic depression that became evident after a major fall in stock prices in the United States. The economic contagio ...

), represents the situation of a country with a currency peg. Two lines represent a country's respective internal (

employment Employment is a relationship between two parties regulating the provision of paid labour services. Usually based on a contract, one party, the employer, which might be a corporation, a not-for-profit organization, a co-operative, or any o ...

vs.

unemployment Unemployment, according to the OECD (Organisation for Economic Co-operation and Development), is people above a specified age (usually 15) not being in paid employment or self-employment but currently available for work during the refe ...

) and external ( current account deficit vs. current account surplus) balance with the axes representing relative domestic costs and the country's

fiscal deficit The government budget balance, also alternatively referred to as general government balance, public budget balance, or public fiscal balance, is the overall difference between government revenues and spending. A positive balance is called a ''g ...

. The diagram is used to evaluate the changes to the economy that result from policies that either affect domestic expenditure or the relative

demand In economics, demand is the quantity of a good that consumers are willing and able to purchase at various prices during a given time. The relationship between price and quantity demand is also called the demand curve. Demand for a specific item ...

for foreign and domestic goods.

Mechanism

When there is a BOP disequilibrium, either by the market forces or policy measures for readjustments, SWAN model is helpful. Internal Balance looks forward to acquiring full employment with lowest possible inflation, whereas External Balance looks towards a "No surplus - No deficit" position in the economy. Any point above the internal balance line (or curve) would have

inflation In economics, inflation is an increase in the general price level of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reduct ...

, and any point below it would have

. Similarly, any point above the external balance line (or curve) would depict a

surplus Surplus may refer to: * Economic surplus, one of various supplementary values * Excess supply, a situation in which the quantity of a good or service supplied is more than the quantity demanded, and the price is above the equilibrium level determ ...

, and any point below it would depict a deficit scenario. To cure the

Inflation In economics, inflation is an increase in the general price level of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reduct ...

, we would use

Contractionary monetary policy Monetary policy is the policy adopted by the monetary authority of a nation to control either the interest rate payable for very short-term borrowing (borrowing by banks from each other to meet their short-term needs) or the money supply, often a ...

which would lower it down and bring the economy to an equilibrium point. To curtail

Unemployment Unemployment, according to the OECD (Organisation for Economic Co-operation and Development), is people above a specified age (usually 15) not being in paid employment or self-employment but currently available for work during the refe ...

, we would use

Expansionary monetary policy Monetary policy is the policy adopted by the monetary authority of a nation to control either the interest rate payable for very short-term borrowing (borrowing by banks from each other to meet their short-term needs) or the money supply, often a ...

which would do the same as above. In order to cure the Current account deficit in the economy, we need to increase the exports by a

devaluation In macroeconomics and modern monetary policy, a devaluation is an official lowering of the value of a country's currency within a fixed exchange-rate system, in which a monetary authority formally sets a lower exchange rate of the national curre ...

, that would, in turn, help in increasing the employment by creating more jobs. For Current account surplus, we would overvalue the currency so that the exports are diminished. The zone above the equilibrium point (the V - shaped) is called the "Critical Zone" because the problem there would be very close to equilibrium. So a policy measure might just worsen the condition by taking, the economy, past the equilibrium point.

References

Paul Krugman article on Latin American currency and the Swan diagram

Australian Treasury article on China which discusses the Swan diagram
International macroeconomics Foreign exchange market Currency Open economy macroeconomics Financial economics {{macroeconomics-stub