Difference between revisions of "Price-specie-flow Mechanism"
Leah Pickett (talk | contribs) (New page: David Hume first proposed this argument, which analyzes how international trade affects domestic society and the gold standard. Hume postulated that when a country has a positive balance o...) |
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− | David Hume first proposed this argument, which analyzes how | + | David Hume first proposed this argument, which analyzes how trade functions between countries on the gold standard. Hume postulated that when a country has a positive balance of trade due to lower prices and less circulating money (in all cases, Hume equates "money" with "gold"), money begins to flow into the country; their goods would, at this point, appear cheaper and more attractive to foreign countries. Therefore, the amount of money in this country increases. Conversely, Hume predicted that when a country has more money and the price of goods become inflated, the country experiences a negative balance of trade. In this situation, a country with more money would, over time, see the net amount of money decrease. |
Hume saw this process of leveling as a constant cycle which consistently re-reestablished equilibrium of money supply as countries fluctuated between positive and negative balances of trade. He compares money to water in that liquid, when connected through channels, will naturally reach the same level everywhere. The only exception to this rule is when there are “barriers” in the water, representing the case of lack of communication between states. | Hume saw this process of leveling as a constant cycle which consistently re-reestablished equilibrium of money supply as countries fluctuated between positive and negative balances of trade. He compares money to water in that liquid, when connected through channels, will naturally reach the same level everywhere. The only exception to this rule is when there are “barriers” in the water, representing the case of lack of communication between states. | ||
Hume recognized that the most favorable point in time for a country is the point at which the acquisition of money and the rise of prices that the increasing quantity of gold and silver cause have not yet initiated an increase in labor prices (and therefore reduced exports). He said that this can be explained by the fact that it takes time for money to trickle down to the employees of those traders and manufacturers who initially procure the increased revenue. It is only when these employees start spending more money en masse that the economy drastically changes.<ref name="Of the Balance of Trade">Hume, David. Essays: Moral, Political, Literary. 1754, 1785. “Of the Balance of Trade.”</ref> | Hume recognized that the most favorable point in time for a country is the point at which the acquisition of money and the rise of prices that the increasing quantity of gold and silver cause have not yet initiated an increase in labor prices (and therefore reduced exports). He said that this can be explained by the fact that it takes time for money to trickle down to the employees of those traders and manufacturers who initially procure the increased revenue. It is only when these employees start spending more money en masse that the economy drastically changes.<ref name="Of the Balance of Trade">Hume, David. Essays: Moral, Political, Literary. 1754, 1785. “Of the Balance of Trade.”</ref> |
Revision as of 22:08, 14 October 2010
David Hume first proposed this argument, which analyzes how trade functions between countries on the gold standard. Hume postulated that when a country has a positive balance of trade due to lower prices and less circulating money (in all cases, Hume equates "money" with "gold"), money begins to flow into the country; their goods would, at this point, appear cheaper and more attractive to foreign countries. Therefore, the amount of money in this country increases. Conversely, Hume predicted that when a country has more money and the price of goods become inflated, the country experiences a negative balance of trade. In this situation, a country with more money would, over time, see the net amount of money decrease.
Hume saw this process of leveling as a constant cycle which consistently re-reestablished equilibrium of money supply as countries fluctuated between positive and negative balances of trade. He compares money to water in that liquid, when connected through channels, will naturally reach the same level everywhere. The only exception to this rule is when there are “barriers” in the water, representing the case of lack of communication between states.
Hume recognized that the most favorable point in time for a country is the point at which the acquisition of money and the rise of prices that the increasing quantity of gold and silver cause have not yet initiated an increase in labor prices (and therefore reduced exports). He said that this can be explained by the fact that it takes time for money to trickle down to the employees of those traders and manufacturers who initially procure the increased revenue. It is only when these employees start spending more money en masse that the economy drastically changes.[1]
- ↑ Hume, David. Essays: Moral, Political, Literary. 1754, 1785. “Of the Balance of Trade.”