The classical economists, who followed Adam Smith, did not doubt that the arguments of their predecessors, the mercantilists, in favor of a chronic export surplus were based on an intellectual confusion. The classical refutation of the mercantilist principle is derived from the so-called Cantillon–Hume price-specie-flow mechanism. By this mechanism an inflow of bullion raises domestic prices, and selling dear and buying cheap tends to turn the balance of trade against the country. Purely automatic forces tend, therefore, to establish a natural distribution of specie between the trading countries of the world and there is a level of domestic prices such that each country’s value of exports equals that of imports.
KeywordsBalance of trade Price-specie-flow mechanism
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