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Monetary Approach to Balance of Payment

Monetary Approach to Balance of Payment – by Harry G. Johnson in 1977

The monetary approach to balance of payment (developed by Harry G. Johnson in 1977) is also known as the ‘Small Country Model of Balance of Payment’ that shows an automatic adjustment between change in money supply (∆Ms) and money demand (∆Md) through the change in the position (deficit/surplus) of Balance of Payment. According to the approach, Balance of Payment is always and everywhere a monetary phenomenon so that there is a significant role of both money supply and money demand in the position of Balance of Payment. The approach is based on given assumptions:

a. The country is small and open economy

b. All countries are functioning with full employment economy

c. There is a fixed exchange rate regime

d. There is no money illusion

e. There is a strong desire of people for adjustment between Ms = Md

f. There is a perfect mobility of goods/s and financial assets from a country to others


g…