The price-specie-flow mechanism illustrated why one nation's gains from trade were accompanied by another country's losses.

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The price-specie-flow mechanism, as described by David Hume, explains how imbalances in trade between countries are naturally corrected over time through the flow of gold and silver (specie), without implying that one nation's gains are necessarily another country's losses. It suggests that countries with trade surpluses will experience an inflow of gold, leading to inflation and higher prices, which eventually makes their goods less competitive abroad, restoring balance. Conversely, countries with trade deficits will see gold flow out, leading to deflation and lower prices, making their goods more competitive abroad, also helping to restore balance. This mechanism operates under the assumption of a gold standard and free movement of gold between nations.

The Price-Specie-Flow Mechanism Illustrated Why One Nation's Gains from Trade