An economic measure for the balance of payments that combines the current account and capital account balances. The equilibrium price represents an alternative approach to the balance of payments surplus or deficit in fixed exchange rate systems.
Economists use the equilibrium price to help determine long-term trends in a country's balance of payments. The measure is less sensitive to short-term fluctuations in interest or exchange rates, providing a long-term view. The basic balance incorporates fluctuations in international capital account investment, making it more sensitive to long-term changes in a nation's productivity.
Balanced price is most commonly used when referring to an average daily balance, particularly when interest is charged on loans. Since banks are not allowed to charge interest on interest, payments are applied first to interest payments due, and then to principal.
For investors who trade margin accounts, the balanced price can be used to determine margin requirements or any margin calls that the brokerage makes.
The balanced price suggests that economic growth is sustainable, and the economy grows in different sectors. A balanced economy has several key characteristics.
- Low inflation - avoiding an unsustainable period of economic growth boom and bust.
- The balance between saving and consumption. An unbalanced economy would consume a high percentage of income. A more balanced economy would save the important percentage of income to finance investment and future productive capacity. Without sufficient savings and investments, long-term growth will be limited.
- Balance of trade. A balanced economy would have a balance between exports and imports, a low current account deficit. If the economy depends on imports and has a current account deficit. This is a sign of imbalance. The current account deficit would have to be financed by capital inflows.
- Housing market that is stable. A stable housing market helps balance the economy. A rapid rise in house prices could cause a positive wealth effect and a temporary increase in spending that is later unsustainable.
- Sustainable bank loans. A balanced economy needs a strong and stable financial sector. Businesses need access to credit, but unlike the credit crisis, bank loans must be sustainable and not depend on other bank loans.
