and hence a foreign trade in these two commodities can be carried on with great advantage to the two countries concerned. For if England gives France a ton of iron in exchange for fifteen sacks of wheat, each country will upon the transaction obtain a profit which in value is to be estimated at five sacks of wheat. But all the gain which arises from this exchange would be at once lost if there were no difference in the relative value of wheat and iron in the two countries, for if wheat as well as iron were three times as dear in France as in England, it would be impossible for England or France to realise any profit by exchanging iron for wheat; the transaction would involve heavy loss to each party, because there would be no profit to counterbalance the expense involved in exporting the commodities from one country to the other. BOOK III. CH. VII. merce be In explaining the profit realised by two countries from Cost of foreign commerce, we omitted to mention the cost of carriage. carrying these commodities from one country to the other. This cost of carriage has, of course, to be deducted when estimating the aggregate gain resulting from foreign trade. This item must not only be considered, but it will be also necessary to point out the causes which fix the exact proportion of the whole cost of carriage which is borne by each of the two countries. It will, however, much simplify our investigations if for the present the consideration of the cost of carriage is omitted. In order still more to If comsimplify the subject, it may, in the first instance, be assupposed sumed that England's foreign commerce is restricted to one restricted country, and that her exports to this country, and her im- to two ports from it, are confined to two commodities. Reverting articles to our former example, let it be supposed that England's foreign commerce consists entirely in sending iron to France, and receiving wheat in exchange for it. As yet it has only been proved that England and France would both realise considerable profit if there was a difference in the relative value of wheat and iron in the two countries. It has been shown above, that upon every ton of iron exported, England and France might both obtain a profit equal in value to five sacks of wheat, if a ton of iron were worth twenty sacks of wheat in France and ten sacks in England: this particular profit would manifestly be realised if fifteen sacks of wheat were given for one ton of iron. BOOK III. be the terms of exchange? But the question now arises-Is it necessary that these, and no others, should be the terms of the bargain? Why whatwould should not twelve sacks of wheat instead of fifteen sacks be given for each ton of iron? The trade would still be highly remunerative to each country, although the profit resulting from the transaction would now be unequally instead of equally distributed, for France would obtain a profit represented by eight sacks of wheat upon each ton of iron exported from England, whereas the profit realised by England upon the same transaction would be no more than two sacks of wheat. The terms of such a bargain are certainly not regulated by blind chance; the buyer and seller in the transactions of international trade are shrewd merchants, whose business it is to buy as cheaply as they can and to sell as dearly. We will therefore proceed to describe the manner in which the bargain is ultimately adjusted. The process by which the equalisa tion of sup mand is effected in this case, If England could receive fifteen sacks of wheat for every ton of iron she exported to France, the quantity of iron which she would be willing to export upon these terms might be greatly in excess of the quantity of iron which ply and de-France requires. If this be so, then the supply of iron to France would manifestly be in excess of the demand; it will therefore be necessary to consider how the supply may be equalised to the demand. In making this investigation it will be shown that the process by which takes place this equalisation is effected exactly resembles that process of equalisation which takes place in the case of commodities which are bought and sold in the country where they are produced. is similar to that which in home trade. When the supply of any commodity is in excess of the demand, the commodity must be cheapened in order to equalise the supply to the demand; by cheapening the commodity its supply will be diminished, and the demand for it will be increased. England, therefore, will be compelled to offer her iron to France on more favourable terms, if the quantity of iron which England exports is more than sufficient to meet the demand which France has for iron. Let it therefore be assumed that France only gives England fourteen sacks of wheat instead of fifteen for each ton of iron. This change in the terms of the bargain will manifestly exert an influence in two distinct ways towards equalising the demand for iron in France to the supply which is imported from England. In the first place, the profit obtained upon the transaction by the English manufacturer of iron will be diminished, and therefore he will be induced to export a less quantity of iron to France than he did when fifteen sacks of wheat were given for each ton of iron. The supply of iron to France will in this manner be decreased. The demand for iron in France will, at the same time, be increased; because if any commodity is cheaper the demand for it always becomes greater. Iron must manifestly be cheapened in France if fourteen sacks of wheat instead of fifteen are given for each ton of this metal which is imported. If, however, this alteration in the terms of the bargain is not sufficient to equalise the demand to the supply, and if the quantity of iron which England is willing to export still exceeds the quantity which France requires, the terms of the bargain must be further altered in the same direction. It may, therefore, be assumed that England will be compelled to offer France iron at the rate of thirteen instead of fourteen sacks of wheat for each ton of metal exported. Let it, therefore, be supposed that these are the terms upon which the international trade is finally adjusted; thirteen sacks of wheat being exchanged for one ton of iron. Some important propositions may be deduced from the description which has just been given of the internal mechanism which regulates the bargains of international trade. As an example, the reader will observe that the whole profit which accrues upon each transaction of international commerce is shared, between the two trading countries, in the inverse ratio of the demand which one country has for the commodity which it imports from the other. Thus, in the case just considered, the partition of the profit between France and England is made according to the following ratio:-England upon each ton of iron exported obtains a profit equal in value to three sacks of wheat, whereas the profit secured by France is seven sacks of wheat, or, in other words, more than twice as much as that which falls to the lot of England. But if the demand for iron in France should increase, France would obtain a smaller share of the profit, and England of course a greater share. BOOK III. Effects of lowering the cost of of one of the commo dities exchanged. This proposition, after what has been stated, can scarcely need any explanation. When thirteen sacks of wheat are given for one ton of iron, there is a certain definite quantity of iron which England is willing to export upon these terms. But if this particular quantity of iron no longer satisfies the demand of France, then France, in order to induce England to send her more iron, must offer higher terms for this iron; and thus France may, in consequence of her increased demand for iron, be compelled to give fourteen sacks of wheat instead of thirteen for each ton of iron. The whole profit of the transaction will then be divided between France and England in the ratio of six to four, instead of in the ratio of seven to three. Let us next inquire what will be the effect upon the ratio in which the aggregate profits are divided if the production production of one of the commodities interchanged is cheapened in England, but not in France. Suppose that in England some rich deposits of iron ore are discovered, or that, in the process of smelting, some improvements are introduced which France has not either the appliances or the enterprise to adopt. The cost of producing iron might in this manner be so materially diminished in England that a ton of iron will become equivalent in value to eight sacks of wheat instead of ten, while at the same time there is no diminution in the cost of producing iron in France; and therefore in that country a ton of iron, if no supplies were obtained from other countries, would be still equivalent in value to twenty sacks of wheat. The whole profit which will now result from the interchange of iron for wheat between England and France will be represented by twelve sacks of wheat, instead of by ten. The question therefore arises, Will England be able to appropriate to herself the whole of the additional profit? That she will be able to do so may at first sight seem probable, because the improvements or discoveries which have cheapened the cost of iron are due entirely to her, and have as yet exerted no effect in diminishing the cost of producing iron in France. England has previously been obtaining from France thirteen sacks of wheat for each ton of iron. If France were still to carry on the commerce upon these terms, now that a ton of iron is only worth eight sacks of wheat in England, the profit obtained by England would It does not follow that the country in which the pro be increased from three sacks of wheat to five sacks of wheat; she would thus appropriate to herself the whole advantage arising from the diminished cost of iron; France still having to give for iron exactly what she did before. But the competition of the English ironmasters will inevitably prevent this taking place: directly they find that the profits obtained upon the export of iron to France are so greatly increased, they will be anxious to send a much larger quantity of iron to France; iron will, in fact, be forced upon the French markets, greatly in excess of the quantity required. This is sure to be the case, since before increased exports of iron were encouraged by high profits, the demand for iron in France was exactly equalised to its supply. The terms upon which the trade between France and England is conducted must become less favourable to the latter country, in order to induce England to export less iron, and also to induce France to purchase a greater quantity of the iron imported from England. In this manner England may be compelled to accept only eleven, or even ten sacks of wheat, for each ton of iron. We have here simply to repeat, what was stated in the case above analysed, that the terms upon which the bargain is finally adjusted depend entirely upon the equalisation of the demand to the supply. If, when a ton of iron is exchanged for eleven sacks of wheat, the quantity of iron sent to France is in excess of that which she requires, the terms of the exchange must be again adjusted; it may for instance happen that when only ten sacks of wheat are given for one ton of iron, the demand for iron in France will be exactly equal to the supply: if this be so, then ten sacks of wheat for one ton of iron will be the terms upon which the exchange is finally adjusted. But if these were the terms upon which the bargain was ultimately arranged, it is manifest that France must obtain the greater portion of the profit which arises from the diminished cost of producing iron, even although this diminution in the cost of producing iron has been confined entirely to England. If ten sacks of wheat are given for a ton of iron, the profit secured by France upon each ton of iron she imports will be an equivalent in value to ten sacks of wheat, whereas the profit secured by England will be only two sacks of wheat. This is a smaller profit than she obtained before BOOK III. CH. VII. duction is cheapened will gain vantage. all the ad |