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demand for any foreign commodity compels her, capteris paribus, to pay dearer for all foreign commodities. The law which we have now illustrated, may be appropriately named, the Equation of International Demand. It may be concisely stated as follows. The produce of a country exchanges for the produce of other countries, at such values as are required in order that the whole of her exports may exactly pay for the whole of her imports. This iaw of International Values is but an extension of the more general law of Value, which we called the Equation of Sup-x ply and Demand.” We have seen that the value of a commodity always so adjusts itself as to bring the demand o the exact level of the supply. But all trade, either between nations or individuals, is an interchange of commodities, in which the things that they respectively have to sell, constitute also their means of purchase: the supply brought by the one constitutes his demand for what is brought by the other. So that supply and demand are but another expression for reciprocal demand : and to say that value will adjust itself so as to equalize demand with supply, is in fact to say that it will adjust itself so as to equalize the demand on one side with the demand on the other.
$3. To trace the consequences of this law of International Values through their wide ramifications, would occupy more space than can be here devoted to such a purpose. But there is one of its applications which I will notice, as béing in itself not unimportant, as bearing on the question which will occupy us in the next chapter, and especially as conducing to the more full and clear understanding of the law itself.
We have seen that the value at which a country purchases a foreign commodity, does not conform to the cost of production in the country from which the commodity / comes. Suppose now a change in that cost of production; ' ' an improvement, for ;:ample, in the process of manufacture.
Will the benefit of the improvement be fully participated in by other countries? Will the commodity be sold as much cheaper to foreigners, as it is produced cheaper at home 2 This question, and the considerations which must be entered into in order to resolve it, are well adapted to try the worth of the theory. Let us first suppose, that the improvement is of a nature to create a new branch of export: to make foreigners resort to the country for a commodity which they had previously produced at home. On this supposition, the foreign demand for the productions of the country is increased; which necessarily alters the international values to its advantage, and to the disadvantage of foreign countries, who, therefore, though they participate in the benefit of the new product, must purchase that benefit by paying for all the other prouctions of the country at a dearer rate than before. How much dearer, will depend on the degree necessary for reestablishing, under these new conditions, the Equation of International Demand. These consequences follow in a very obvious manner from the law of international values, and I shall not occupy space in illustrating them, but shall pass to the more frequent case, of an improvement which oes not create a new article of export, but lowers the cost of production of something which the country already exorted. It being advantageous, in discussions of this complicated nature, to employ definite numerical amounts, we shall return to our original example..Ten yards of cloth, if produced in Germany, would require the same amount of labour and capital as twenty yards of linen; but, by the play of international demand, they can be obtained from England for seventeen. Suppose now, that by a mechanical improvement made in Germany, and not capable of being transferred to England, the same quantity of labour and capital which produced twenty yards of linen, is enabled to produce thirty. Linen falls one-third in value in the German market, as compared with other commodities produced in Germany. Will it also fall one-third as compared with English cloth, thus giving to England, in common with Germany, the full benefit of the improvement Or (ought we not rather to say), since the cost to England of obtaining linen was not regulated by the cost to Germany of producing it, and since England, accordingly, did not get the entire benefit even of the twenty yards which Germany could have given for ten yards of cloth, but only obtained seventeen—why should she now obtain more, merely because this theoretical limit is removed ten degrees further off? It is evident that in the outset, the improvement will lower the value of linen in Germany, in relation to all *} commodities in the German market, including, among the rest, even the imported commodity, cloth. If 10 yards of cloth previously exchanged for 17 yards of linen, they will now exchange for half as much more, or 25% yards. But whether they will continue to do so, will depend on the cos which this increased cheapness of linen produces on the in: ternational demand. The demand for linen in England could scarcely fail to be increased. But it might be increased either in proportion to the cheapness, or in a greater proportion than the cheapness, or in a less proportion. If the demand was increased in the same proportion with the cheapness, England would take as many times 25% yards of linen, as the number of times 17 yards which she took previously. She would expend in linen exactly as much of cloth, or of the equivalents of cloth, as much in short of the collective income of her people, as she did before. Germany, on her part, would probably require, at that rate of interchange, the same quantity of cloth as before, because it would in reality cost her exactly as much ; 25% yards of linen being now of the same value in her market, as 17. yards were before. In this case, therefore, 10 yards of cloth for 25% of linen is the rate of interchange which under thesd new conditions would restore the equation of international y demand; and England would obtain linen one-third cheaper than before, being the same advantage as was obtained by
It might happen, however, that this great cheapening of linen would increase the demand for it in England in a greater ratio than the increase of cheapness; and that if she before wanted 1000 times 17 yards, she would now require more than 1000 times 25+ yards to satisfy her demand. If so, the equation of international demand cannot establish itself at that rate of interchange ; to pay for the linen England must offer cloth on more advantageous terms: say, for example, 10 yards for 21 of linen; so that England will not have the full benefit of the improvement in the production of linen, while Germany, in addition to that benefit, will lso pay less for cloth. But again, it is possible that Eng
\land might not desire to increase her consumption of linen
in even so great a proportion as that of the increased cheapness; she might not desire so great a quantity as 1000 times 25% yards: and in that case Germany must force a demand, by offering more than 254 yards of linen for 10 of cloth ; linen will be cheapened in England in a still greater degree than in Germany; while Germany will obtain cloth on more unfavourable terms, and at a higher exchange value than before. After what has already been said, it is not necessary to particularize the manner in which these results might be modified by introducing into the hypothesis other countries and other commodities. There is a further circumstance by which they may also be modified. In the case supposed, the consumers of Germany have had a part of their incomes set at liberty by the increased cheapness of linen, which they may indeed expend in increasing their consumption of that article, but which they may, likewise, expend in other articles, and among others, in cloth or other imported commodities. This would be an additional element in the international demand, and would modify more or less the terms of interchange. Of the three possible varieties in the influence of cheapness on demand, which is the more probable—that the demand would be increased more than the cheapness, as much as the cheapness, or less than the cheapness? This depends on the nature of the particular commodity, and on the o X o of purchasers. When the commodity is one in general request, and the fall of its price brings it within the reach of a much larger class of incomes than before, the demand is often increased in a greater ratio than the fall of price, and a larger sum of money is on the whole expended in the article. Such was the case with coffee, when its price was lowered by successive reductions of taxation; and such would probably be the case with sugar, wine, and a large class of commodities which, though not necessaries, are largely consumed, and in which many consumers indulge when the articles are cheap and economize when they are dear. But it more frequently happens that when a commodity falls in price, less money is spent in it than before : a greater quantity is consumed, but not so great a value. The consumer who saves money by the cheapness of the article, will be likely to expend part of the saving in increas‘ng his consumption of other things: and unless the lo price attracts a large class of new purchasers who ...× either not consumers of the article at all, or only in small quantity and occasionally, a less aggregate sum will be expended on it. Speaking generally, therefore, the third of our three cases is the most probable: and an improvement in an exportable article is likely to be as beneficial (if not more beneficial) to foreign countries, as to the country vo
where the article is produced: - --T-t
§ 6. Thus far has the theory of international values been carried in the first and second editions of this work. But intelligent criticisms, and subsequent further investigation, have shown that the doctrine stated in the preceding pages, though correct as far as it goes, is not yet the complete theory of the subject matter.
It has been shown that the exports and imports between the two countries (or, if we suppose more than two, between each country and the world) must in the aggregate pay for