Swan diagram

{{More citations needed|date=April 2021}} In [[economics]], a '''Swan Diagram''', also known as the '''Australian model''' (because it was originally published by [[Australia]]n economist [[Trevor Swan]]<ref>{{Cite web|date=2010-11-17|title=Swan Songs|url=https://krugman.blogs.nytimes.com/2010/11/17/swan-songs/|access-date=2021-03-18|website=Paul Krugman Blog|language=en-US}}</ref> in 1956 to model the Australian economy during the [[Great Depression]]), represents the situation of a country with a [[currency peg]].<ref>{{Cite news|title=China: A Tale of Three Swan Songs|language=en-US|work=SeekingAlpha|url=https://seekingalpha.com/article/195725-china-a-tale-of-three-swan-songs|access-date=2021-03-18}}</ref>

Two lines represent a country's respective internal ([[employment]] vs. [[unemployment]]) and external ([[Current account (balance of payments)|current account deficit]] vs. [[Current account (balance of payments)|current account surplus]]) balance with the axes representing relative domestic costs and the country's [[fiscal deficit]]. The diagram is used to evaluate the changes to the economy that result from policies that either affect domestic expenditure or the relative [[demand (economics)|demand]] for foreign and domestic goods.

== Mechanism == When there is a [[Balance of payments|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]], and any point below it would have [[unemployment]]. Similarly, any point above the external balance line (or curve) would depict a [[Current account surplus|surplus]], and any point below it would depict a [[Current account deficit|deficit]] scenario.

To cure the [[Inflation]], we would use [[Contractionary monetary policy]] which would lower it down and bring the economy to an [[List of types of equilibrium|equilibrium]] point. To curtail [[Unemployment]], we would use [[Expansionary monetary policy]] 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]], that would, in turn, help in increasing the employment by creating more jobs. For [[Current account surplus]], we would [[Overvaluation|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== {{Reflist}} * [http://web.mit.edu/krugman/www/swansong.html Paul Krugman article on Latin American currency and the Swan diagram] * [http://www.treasury.gov.au/documents/1042/HTML/docshell.asp?URL=08_RMBundervaluation.asp Australian Treasury article on China which discusses the Swan diagram]

{{DEFAULTSORT:Swan Diagram}} [[Category:International macroeconomics]] [[Category:Foreign exchange market]] [[Category:Currency]] [[Category:Open economy macroeconomics]] [[Category:Financial economics]]