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 analy ...

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

Trevor Swan Trevor Winchester Swan (14 January 1918 – 15 January 1989) was an Australian economist. He is best known for his work on the Solow–Swan growth model, published simultaneously by American economist Robert Solow, for his work on integrating i ...

in 1956 to model the Australian economy during the Great Depression), represents the situation of a country with a

currency peg A fixed exchange rate, often called a pegged exchange rate, is a type of exchange rate regime in which a currency's value is fixed or pegged by a monetary authority against the value of another currency, a basket of other currencies, or another m ...

. Two lines represent a country's respective internal ( employment 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 refer ...

) and external (

current account deficit In economics, a country's current account records the value of exports and imports of both goods and services and international transfers of capital. It is one of the two components of its balance of payments, the other being the capital accou ...

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 BOP or Bop may refer to: Animals and plants * Bird of prey, eagles, hawks, owls and other raptors *Bird-of-paradise, a family of birds *BOP clade, a lineage of plants in the grass family (Poaceae) Government and law *Balance of power (disambigua ...

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 reductio ...

, 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 A deficit is the amount by which a sum falls short of some reference amount. Economics * Balance of payments deficit, when the balance of payments is negative * Government budget deficit * Deficit spending, the amount by which spending exceeds ...

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 reductio ...

, 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 refer ...

, 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 economics, a country's current account records the value of exports and imports of both goods and services and international transfers of capital. It is one of the two components of its balance of payments, the other being the capital accou ...

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 cur ...

, 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