ABSTRACT
This chapter outlines the new approach to the theory of the balance of payments and of balance-of-payments adjustment that has been emerging in years from several sources. To put the new approach in perspective, it is helpful to go back to the origins of balance-of-payments theory in the work of David Hume, and specifically his contribution of the analysis of the price-specie-flow mechanism. Hume's analysis ran in terms of an automatic mechanism of international adjustment motivated by money flows and consequential changes in national money price levels. Cassel contributed the purchasing-power-parity theory of the equilibrium determination of the values of floating exchange rates. The chapter discusses theoretical issues in model-construction to an exposition of some monetarist models of balance-of-payments behaviour in a growing world economy. It aims to develop some general expressions relating the growth rates of economic aggregates to the growth rates of their components or of the independent variables to which they are functionally related.
