General - External Balance

External balance means that you want to try to keep the flows of money in to and out of the country roughly balanced over a period of several years. If there are significant outflows of money (maybe because imports are higher than exports) then these have to be financed somehow. This may mean borrowing from overseas governments or banks, or perhaps attracting inward investment into the UK. However this financing is done, it is difficult to sustain at very high levels for a number of years, and so you want to try to avoid significant balance of payments deficits over the long term.

When you are running the Virtual Economy, you don't have any direct control over the balance of payments, but there are a few things to look out for to ensure that you don't get too many balance of payments problems:

1. Don't allow the economy to grow too fast. This will lead to imports increasing quickly to satisfy the extra demand. You don't want excessive growth anyway as you'll also get inflationary problems.
2. Try to keep inflation low and stable. If inflation in the UK is higher than abroad then this will put UK firms at a disadvantage and make them less able to compete with overseas firms.
3. Try to keep interest rates as low as possible (without letting inflation rise) to allow UK firms to invest and therefore become more competitive in the long run.

Why not try some of these policies on the Virtual Economy? Click either on the 4th floor in the side panel or on 'The Model' in the top navigation bar to get to the model. Have a look at the present forecasts for the economy and decide what you think would be the most appropriate policies. Try to keep the balance of payments between reasonable limits of surplus and deficit and don't let it get out of control. If you want to see how quickly a deficit can develop, then try giving the economy a significant boost (using reflationary policies), and see what happens to the balance of payments.

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