ABSTRACT
The analysis applies equally well to shock changes in the parameters and once-for-all adjustments to them, as to continuous displacements of equilibrium due to development and growth. If originally trade was balanced, a deficit or a surplus tends to appear, and it tends to grow bigger and bigger at an ever increasing rate. Sooner or later disequilibrium must be corrected either by suitable changes in absorption, income, and the general price level, or by adjustments in the rate of exchange. Stable exchange rates may be an essential objective of economic policy, and it is through suitable adjustments in the terms on the right-hand side of that it is meant to be achieved. In the first place, the condition that the countries concerned are and remain in external balance precludes the possibility of the balance of trade ratio b being different from unity.
