oring to carry on a
business that can not be made "to pay" in the face of foreign
competition. It is easy to believe that a country ought not to import
goods unless it is at an _absolute_ disadvantage in their production.
It is often declared that as our country can produce any kind of goods
"as well" as foreign countries (meaning with as few days' labor),
there is a loss on every unit imported. The fundamental principle of
trade as applied to such cases shows that not the advantage which
one country enjoys over the other as to a single product determines
whether it will gain by producing at home, but the comparative
advantages enjoyed in the production of the two articles in question.
As a simple example, suppose that a day's labor in country A will
secure two bushels of wheat (2x) and two hundred pounds of iron (2y),
whereas in B a day's labor will secure 1x or 2y. Then A's comparative
advantage in producing x becomes a reason for A's not trying to
produce y. Trade can take place (aside from transportation outlay)
at any ratio between 2x = 2x (A's minimum) and 2x = 4y (B's maximum).
Evidently at any rate between these two ratios each party would gain
something by the trade, e.g., at 2x = 3y A would get 3 instead of 2y
by a day's labor, and B would get 1-1/3x instead of 1x for a day's
labor (2x for 1-1/2 day's labor instead of for two days'). If,
however, A could produce exactly twice as much of everything as B
could, then there could be no motive on either side for trade. But
this never happens.
Sec. 6. #Equation of international exchange.# Foreign trade of course
can take place as barter, and in earlier times, particularly, very
commonly did so. But in the existing monetary economy nearly all
trades are expressed in terms of monetary prices. Both the prices
of all the particular objects of international trade and the general
levels of prices in any two trading countries come to be pretty
definitely interrelated. Changes in the one country at once compel
readjustments in the other. To understand in the most general way
how this occurs, a knowledge at least of the elementary principles of
foreign exchange is required, and to this we may now turn.
Let us begin with the proposition known as the equation of
international exchange, which is sometimes given thus: the value of
the imports of a country must in the long run equal the value of
the exports. But this proposition (especially the words imports and
exports) m
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