CH. II

THE CONDITIONS OF EQUILIBRIUM

163

on p. 132, I includes an allowance for exports andimports of gold, but L does not; that is, say, I isequal to the sum of the home investment, the foreignlending, and the imports of gold.

These are the conditions of internal equilibrium.But when we are no longer dealing with a ClosedSystem, we require also a condition of external equi-librium. Clearly there can be no such equilibrium solong as there is a continual movement of gold intoor out of the country. The condition of externalequilibrium is, therefore, that G = 0, i.e. that L = B,so that the value of Foreign Investment (i.e. of the .Foreign Balance) is equal to Foreign Lending.

Thus complete equilibrium requires both that L = S xand L = I/, and that L = B.

With the implications of this condition of externalequilibrium we shall deal in Chapter 21 below. But (there are one or two broad conclusions which may bementioned here.

In the first place, the amount of the Foreign Bal-ance in any given situation depends on the relative^ price-levels at home and abroad of the goods andservices which enter into international trade. Theamount of Foreign Lending, on the other hand, de-pends on relative interest rates (corrected, of course,for variations of risk, etc., so as to represent the netadvantage of lending) at home and abroad. Nowthere is no direct or automatic connection betweenthese two things ; nor has a Central Bank any directmeans of altering relative price-levels. The weaponof a Central Bank consists in the power to alterinterest rates and the terms of lending generally.Thus when there is a change in the price-level abroador in the demand-schedules of foreign borrowers (i.e.in their eagerness to borrow at given rates of interest)not reflected in corresponding changes at home, theonly means open to the Central Bank for the preserva-tion of external equilibrium is to change the terms of