Price-specie flow mechanism(redirected from Price specie flow mechanism)
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Price-specie flow mechanism
Price-Specie Flow Mechanism
An argument David Hume made against those who argued that a favorable balance of trade is always good public policy. The price-specie flow mechanism states that under a gold standard, countries with positive trade balances are effectively importing gold (money) in exchange for their exports while those with negative trade balances are exporting gold in exchange for imports. The increase in gold in countries with positive trade balances causes inflation, which makes prices rise and in turn makes imports more competitive. Conversely, the decrease in gold in countries with negative trade balances causes deflation, which makes price fall and exports more competitive internationally. This cause the balance of trade to shift in both countries. Thus, Hume argued that a trade balance is relatively unimportant because it tends to balance itself out in the long term.