Explain the method which restores the balance of payments equilibrium whereas it is disturbed under the gold standard.
Under the gold standard the adjustment mechanism is referred to as the price-specie-flow mechanism expounded through David Hume. Under the gold standard, a balance of payment disequilibrium will be accurate by a counter-flow of gold. Assume that the U.S. imports more from the U.K. than it exports to the latter. Under the classical gold standard, gold, that is the only means of international payments, will flow from the U.S. to the U.K. As a result, the U.S. (U.K.) will experience decrease (increase) in money supply. It means that the price level will tend to fall in the U.S. and increase in the U.K. Consequently, the U.S. products become more competitive in the export market, while U.K. products become less competitive. This change will develop U.S. balance of payments and at the similar time hurt the U.K. balance of payments, eliminating the initial BOP disequilibrium eventually.