ABSTRACT
Balance of payments theory was considered in Chapters 6 to 8 and the exchange rate in Chapter 9. This chapter seeks to integrate the analysis of these four chapters so as to extend the analysis and, especially, to highlight the main considerations which infl uence economic policy in medium-sized open economies such as the UK. In apparently paradoxical contradiction to the conventional wisdom of the 1960s, modern theories suggest that the main determinant of the balance of payments is domestic macroeconomic policy, especially the level of government spending, and the level of domestic credit expansion on which it is the major infl uence. On the other hand, the exchange rate is important primarily as an infl uence upon the level of employment and the price level.
