ABSTRACT
It has long been recognized that the formation of a free trade area or customs union might involve balance of payments difficulties for the countries concerned. Removal of trade barriers between two countries A and B may lead to an increase in the relative demand for goods from A compared with those from B. This could be corrected by revaluing the currency of A in relation to B (Meade 1957). Adjustments of this kind have implicitly been assumed to have taken place in the discussion of trade creation and trade diversion in Chapter 3.
