The external equilibrium in an economy can be achieved when the balance of payments position is in equilibrium in the economy. A positive relationship is required between the government expenditure and interest rate for an external balance position in the equilibrium. The US economic policy should focus on improving the current account balance in order to have positive effects on the external balance.
The current account balance for the United Statescan be improved through increasing the exports of the nation, particularly those of the much needed commodities like wheat and copper, introducing protectionist measures for trade, as well as constantly accessing and revaluating the exchange rate for a beneficial balance of payments position. Similarly the capital account balance also needs to be supported through inflows particularly in the form of investment in the regional businesses by international institutions.
Expenditure switching policy is used to attain a positive balance between domestic expenditure and foreign expenditure, particularly in terms of the balance of payments of a country. This is a macroeconomic policy which can help an economy attain its internal and external balances. More over “nominal exchange rate changes can lead to ‘expenditure switching’ when they change relative international prices” (Engel, 2002). The US economy can improve its internal and external balance position by manipulating the demand for the domestic and the foreign products through changes in the exchange rate of the country. In order to achieve both the internal balance as well as the external balance positions simultaneously through policy moves, theUSgovernment can value the dollar at a real exchange rate that reflects the real demand of the domestic products and the demand that exists for the imports in the region. This can be favorable for the balance of payments position for theUnited States.