COMPARATIVE COSTS 
25 
Observe that the prices of the goods are such that wheat moves 
from the United States to Germany, linen from Germany to the 
United States. Wheat, tho produced in the United States by 
labor receiving wages higher than those in Germany, yet sells for 
$0.75 in the United States. Wheat, if produced in Germany would 
sell there for $1.00; its domestic supply price — its cost of pro- 
duction in the business sense — is higher in Germany even tho 
it is produced by labor receiving wages lower than those in the 
United States. This sort of situation is apt to surprise most 
people : how can an article sell at a low price in a country where 
wages are high? The answer is simple enough: it can do so if 
the high paid labor is effective, as in this case with American labor 
for wheat. On the other hand, Germany can produce linen at a 
lower price than the United States, notwithstanding the fact that 
German labor is less effective in producing linen than American. 
The explanation again is simple: the labor, tho less effective, 
is paid at a money rate which is not only less, but is lower to an 
extent more than in proportion to the less effectiveness. Wheat is 
cheaper in the United States, tho produced with high-paid labor; 
linen is cheaper in Germany, tho produced with ineffective labor. 
Come now a step still closer to reality. What quantities of 
goods might be expected to move between the two countries, and 
what total sums of money might they represent in the way of 
imports and exports ? 
Suppose — again for illustration — 
The U. S. sends to Germany 8,000,000 bushels of wheat at $0.75 = $6,000,000. 
Germany sends to the U. S. 9,000,000 yards of linen at $0.662 = $6,000,000. 
The money sums balance ; the wheat sent from the United States 
exactly suffices to pay for the linen received from Germany. The 
transactions will be carried out thru the mechanism of the foreign 
exchanges, and the demands for bills of exchange would be exactly 
met by the offerings of exchange. Exchange would be at par, no 
specie would flow between the two countries; all is quiet. 
With these transactions, 8,000,000 bushels wheat exchange for 
9,000,000 yards linen. The barter terms of trade thus are 8 wheat 
= 9 linen; or, 10 wheat = 11} linen. That the trade takes place