ABSTRACT
The supply-and-demand tool, for instance, may throw more light on one aspect of what actually takes place, and the real-income-effect tool on another. If autonomous expenditure on home produced goods increased to El', absorption and aggregate income would have to increase to OA'and OY' respectively. In the classical analysis the effect on the balance of trade of a reduction of absorption depends on how the price OP changes, the volume of output OL being constant. Thus a reduction in the quantity of money, due to an outflow of gold and foreign exchange reserves, leads to a fall in the money value of aggregate output, but it does not lead to any fall in the aggregate output itself. In a model of international trade in which exportables, importables, and domestic goods appear as variables, the money value of exports, imports, and of aggregate output may thus be identified with the volume of those exports, imports, and aggregate output.
