David Hume-the price-Specie-flow mechanism (1)

One of the first attacks on mercantilist tough was raised by David Hume (in this political Discourses 1752) with his development of the price-specie-flow mechanism.Hume challenged the mercantilist view that a nation could continue to accumulate specie without any repercussions to its international competitive position .he argued that the accumulation of gold by means of a trade surplus would lead to an increase in the money supply and therefore to an increase in prices and wages. the increases would reduce the competitiveness of the country with a surplus.note that Hume is assuming that changes in the money supply would have an impact on prices rather than on output and employment.at the same time,the loss of gold in the deficit country would reduce its money supply,price,and wages,and increase its competitiveness . thus,it is not possible for a nation to continue to maintain appositive balance of trade indefinitely.a trade surplus automatically produces internal repercussions that work to remove that surplus.the movement of specie between countries serves as an automatic adjustment mechanism that always seeks to equalize value of exports and imports.
today the classical price -specie-flow mechanism is seen as resting on several assumptions.