# Swan diagram

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In [economics](/source/Economics), a **Swan Diagram**, also known as the **Australian model** (because it was originally published by [Australian](/source/Australia) economist [Trevor Swan](/source/Trevor_Swan)[1] in 1956 to model the Australian economy during the [Great Depression](/source/Great_Depression)), represents the situation of a country with a [currency peg](/source/Currency_peg).[2]

Two lines represent a country's respective internal ([employment](/source/Employment) vs. [unemployment](/source/Unemployment)) and external ([current account deficit](/source/Current_account_(balance_of_payments)) vs. [current account surplus](/source/Current_account_(balance_of_payments))) balance with the axes representing relative domestic costs and the country's [fiscal deficit](/source/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](/source/Demand_(economics)) for foreign and domestic goods.

## Mechanism

When there is a [BOP](/source/Balance_of_payments) 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](/source/Inflation), and any point below it would have [unemployment](/source/Unemployment). Similarly, any point above the external balance line (or curve) would depict a [surplus](/source/Current_account_surplus), and any point below it would depict a [deficit](/source/Current_account_deficit) scenario.

To cure the [Inflation](/source/Inflation), we would use [Contractionary monetary policy](/source/Contractionary_monetary_policy) which would lower it down and bring the economy to an [equilibrium](/source/List_of_types_of_equilibrium) point. To curtail [Unemployment](/source/Unemployment), we would use [Expansionary monetary policy](/source/Expansionary_monetary_policy) which would do the same as above. In order to cure the [Current account deficit](/source/Current_account_deficit) in the economy, we need to increase the exports by a [devaluation](/source/Devaluation), that would, in turn, help in increasing the employment by creating more jobs. For [Current account surplus](/source/Current_account_surplus), we would [overvalue](/source/Overvaluation) 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

1. **[^](#cite_ref-1)** ["Swan Songs"](https://krugman.blogs.nytimes.com/2010/11/17/swan-songs/). *Paul Krugman Blog*. 2010-11-17. Retrieved 2021-03-18.

1. **[^](#cite_ref-2)** ["China: A Tale of Three Swan Songs"](https://seekingalpha.com/article/195725-china-a-tale-of-three-swan-songs). *SeekingAlpha*. Retrieved 2021-03-18.

- [Paul Krugman article on Latin American currency and the Swan diagram](http://web.mit.edu/krugman/www/swansong.html)

- [Australian Treasury article on China which discusses the Swan diagram](http://www.treasury.gov.au/documents/1042/HTML/docshell.asp?URL=08_RMBundervaluation.asp)

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