Equilibrium of balance of payments

Question

State mechanism that restores equilibrium of balance of payments in case it gets disturbed below the gold standard.

Answer 1

Adjustment mechanism under gold standard is known as price-specie-flow mechanism expounded by the David Hume. Under gold standard, disequilibrium of balance of payment will get corrected by counter-flow of gold. Assume that U.S. imports in large amount from the U.K. as compared to the latter. Under the classical gold standard, gold, that is the only mode of international payments, will flow from the U.S. to the U.K. Consequently, the U.S. (U.K.) may have a decrease (increase) in supply of money. Which state that the price level may tend to fall in U.S. and increase in the U.K. Consequently, U.S. products may become more competitive in the export market, on the other hand products of the U.K. becomes less competitive. This modification might improve the U.S. balance of payments and simultaneously hurt the U.K. balance of payments, finally removing the initial BOP disequilibrium.