A Balance-of-Trade Deficit and the Rate of Exchange in Conditions of Free Trade

WE shall now turn from a consideration of Commercial Policy and shall assume once more that there is a free trade policy in both countries, A and B. But we no longer assume that the balance of trade of each country is zero. Our purpose in this section will be (a) to show how a balance-of-trade deficit or surplus can be represented on our geometric diagrams and (b) to consider the relationship, in a free trade world, between the size of the balance-of-trade deficit or surplus and the rate of exchange and barter terms of trade.