Moreover,the applicability of the analysis to policy problems was severely restricted by its assumption of general under-employment,which implied an elastic supply of aggregate output, and allowed the domestic-currency wage or price level to be treated as giwen.independently of the balance of The pre-war approach to interational monetary theory reflected the way in which balance of payments problems tended to appear at the time,namely as problems of international etary adjustment. Since the war,for ron which need not b eaborated here,the balance of payments has come to be a major problem for conomic policy in many countries. Correpondingly,a new (though still Keyesian)heoretica approhto balance-of-payments "foreign trade multiplier theory"and"elasticity analysis"of the pre-war period in two major espects:it poses the problems of balance-of-payments adjustment in a way which highlights The cssence of this approach,which has been termed "the absorption approach",is to the economy,rather than as a relarion between the oury's credits and debitsoninteration account.This approach has been implicit to an important extent in the thinking of practical with balance-of-paymentsprobe ost-war onditions.Its min formal development is to be found in the works of Meade (1951),Tinbergen (1952),an Alexander (1952),though many others have contributed (Stuvel,1951;Harberger,1950; generalize the work of these writers,and to use their approach to clarify certain aspects of the balance-of-payments policy problem. Let us first summarize the traditional approach to balance-of-peyments theory.The balance of payments must necessarily balance,when all interational transactions are taken into account:for imbalance or disequilibrium to be possible,it is necessary to distinguish between se whichare the the free and onary choices of individual transactors.within whatever restrictions are imposed by economic variables or policy on their behaviour-and "induced"or"accommodating"international which are undertaken by the oreign the free choices of the individual transactors-and to define the "balance of payments"to include only autonomous transactions.To put the'point another way,balance-of-payments problems presenceof n official foreign exchange authority which is prepared tooperate i the foreign exchange market by the use of official reserves so as to influence the exchange rate; "is defined by changes in the official reserves,assciated with imbalance ms of Alexander's Machlup nent of this pnper attempts a reoonciliation of the two appmaches in a broeder framework of analysis