External Equilibrium Theory

Abstract

The classical view was that the balance of payments adjusted itself under the gold standard in an elegant manner. We may begin by ignoring capital movement and concentrate upon the income account, and particularly on the merchandise part of it. We assume that the income account has to be kept in balance. The arguments relating to this apply also if there is what may be called a normal or ‘ autonomous’ outflow or inflow of capital proceeding, the requirement for the income account then being that it should have a corresponding surplus or deficit.