It was based on the premise that only through freer international trade can countries fully exploit the gains from increased specialization, enhanced productivity, and greater competitiveness. These four principles can be likened to the four legs of a chair. The chair is steadier when all four legs are the same length.
By contrast, a sustained portfolio shock has little effect on aggregate demand and provides no offset to the inflationary consequences of the currency’s fall.3 Central banks are supposed to respond to currency depreciations caused by portfolio shocks but not necessarily terms-of-trade shocks.