Price specie flow mechanism
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The price specie flow mechanism is a logical mechanism created by David Hume which dispeled the Mercantilist (1700-1776) notion that a nation can have a continuously favorable balance of trade. Hume reasoned that a favorable balance of payments within a nation would lead to an increase in specie within an economy (Nation 1). An increase such as this would eventually lead to an increase in the general level of prices in Nation 1. From this he posited that Nation 2, the country with the unfavorable balance of trade, will have a fall in the general level of prices. Because of this in Nation 1 exports will fall and imports will rise and the opposite will occur in Nation 2. Ultimately this leads to a self-correction of sort to trade imbalances.
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