ABSTRACT
The balance of payments and the balances on current and capital account figure prominently in international monetary economics. The so called ‘pure theory’ of trade deals mainly with various propositions about the determinants of commodity trade and its welfare implications. It is largely confined to situations of balanced trade, by contrast with the ‘monetary theory’ of trade which treats macroeconomic questions of usually unbalanced trade in both goods and financial instruments. The monetary theory of trade extends the closed economy treatment of traditional questions about the determinants of output, employment and unemployment in this unbalanced trade context. To do so it must treat the further issues of how exchange rates are determined and the significance of the balance of payments and related concepts. A variety of approaches to these concepts have evolved as changing circumstances have forced a reconsideration of their meaning. Important amongst the factors that have led to successive rethinking of international monetary economics have been shifts in institutional arrangements in relation to trade, exchange rates and the mobility of financial capital.
