The Accounting, Formal Definitions and the Assumptions
The main proposition underlying the formal payments-adjustments model is that planned international investment and planned international saving respond to two separate sets of determining variables. While the two flows do interact, there is no dominating force that can be relied upon to establish equality between the two flows with any degree of automaticity, and it is quite possible that a nation will find it either impossible or undesirable to finance any excess of planned investment over planned saving. Thus frequent or continuing policy adjustments may be necessary if a satisfactory international performance is to be achieved. The failure of international investment and international saving to become equal to each other may be due to institutional rigidities, to the ponderousness and inefficiency of such equilibrating mechanisms as do exist or to perverse variability in any exogenous forces. Alternatively the international system may fail to adjust automatically because the authorities in either the deficit or the surplus nation are unwilling to incur the costs of adjustment — measured by the consequent failure to achieve domestic goals — so that any equilibrating mechanism is deliberately counteracted.
KeywordsCurrent Account Competitive Ratio Trade Balance Tradable Good Phillips Curve
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