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I’ve recently come across a paper which states that trade imbalances during the gold standard caused outflows/inflows of gold from the country running the trade surplus/deficit thus securing balanced trade over time as price levels get adjusted. However, I’m a bit confused about how that would work exactly. Isn’t trade always balanced since an imbalance on the current account is canceled out by an equal opposite imbalance on the financial account? Hence, if say a country was running a trade deficit(outflow of gold) during the that deficit could only be financed through international FDI or lending (inflow of gold), resulting in no overall change in its gold reserves. Please let me know what it is that I’m getting wrong.

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  • $\begingroup$ The flow of money (including gold) is part of the financial account. So an outflow of gold (to pay for imports) is itself the equal and opposite thing. $\endgroup$
    – Daniel
    Dec 26, 2023 at 20:57

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However, I’m a bit confused about how that would work exactly. Isn’t trade always balanced since an imbalance on the current account is canceled out by an equal opposite imbalance on the financial account?

Trade does not need to be balanced, financial account is not part of the trade balance. Balance of trade is the net exports which is defined as imports minus exports. Trade balance does not include financial flows.

I think you might be confused about this because basic economic theories argue that over long run trade should balance (since trade deficit puts pressure on exchange rate to depreciate and vice versa) but that is long run result. In short run country can run massive trade deficits. For example Routers reports that the US trade deficit was last year in January around 89.7bn USD.

Hence, if say a country was running a trade deficit(outflow of gold) during the that deficit could only be financed through international FDI or lending (inflow of gold), resulting in no overall change in its gold reserves.

No the deficit can be financed from gold reserves that the country accumulated in the past.

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