INTERNAL AND EXTERNAL EQUILIBRIUM
Just as economic instability tends to spread from industry to industry or from city to city, so also does it spread from nation to nation. No matter how large or how small it is, a nation undergoing either unemployment or inflation cannot help but detract from the stability of its trading partners. In an inflation residents tend to buy abroad rather than at home, because prices are lower in other countries; for the same reason foreigners shy away from buying exports of the country concerned. Because of both increased imports and decreased exports, a balance-of-payments deficit ensues, and the inflationary demand is transmitted to other countries. Conversely in a depression, when prices and incomes fall, residents tend to buy less of all goods, both domestic and foreign; the decrease in their imports adversely affects the national income of foreigners. The relatively greater decline in the prices of the depression country, as opposed to other countries, further encourages a decrease in its residents' imports, helping spread the depression to other countries.
In earlier chapters we have defined equilibrium as the point at which transactions tend to repeat themselves indefinitely, for there is no force calling for increase or decrease in any of the variables. Now, however, we discover that this type of equilibrium is only part of the complex of economic transactions, and we must refer to it in a more narrow way. Let us call it internal equilibrium. So long as propensities to consume, import, save, and invest are such that consumption, imports, saving, and investment remain the same from period to period and foreigners' demand for exports does not change, the conditions of internal equilibrium are satisfied. Nowhere among the functional relationships that define equilibrium is there any indication that exports must equal imports, or that trade deficits must be offset by voluntary (or ex ante) international capital movements. The balance of payments may be in surplus or deficit indefinitely, without disturbing the conditions of internal equilibrium.