Balance of payments surpluses and deficits mean the international sector of our economy is in disequilibrium. The importance of the balance of payments is that it measures imbalance in our international sector, thereby pointing to economic forces for change. One purpose of this chapter is to identify these forces and how they bring about change.
Monetary and fiscal policies are shocks to the economy that affect many economic variables, such as income, interest rates, and prices. Changes in these variables create imbalances in the international sector, which in turn set in motion forces that modify the impact of these policies on the economy. A second purpose of this chapter is to examine how our earlier discussions of monetary and fiscal policies must be adjusted to recognize the influence of forces generated through the international sector of the economy. The recent increase in the openness of the U.S. economy requires that its macroeconomic analysis pay more attention to these forces.
