208 ECONOMIC PRINCIPLES

the case, for, as in domestic exchange the relative marginal
utilities and the relative costs of production of the goods are
harmonised, the adjustment of costs necessarily follows from
the adjustment of utilities in international exchange, when
the goods exchanged are produced at home as well as
imported from abroad. The various possible combinations,
of conditions of decreasing, constant or increasing returns,
in the industries concerned with the goods entering into
international trade, afford some variations of the course of
change, and in the degree in which relative values are
affected. Into all of these it is not necessary to enter in detail
here. One case presents a feature of special interest, namely,
where the industry, with whose product the imported goods
compete, is one which manifests increasing returns. The
limitation of its market, by the competition of the imported
goods, will diminish the economies of production, or hinder
the extension of such economies. In strictness, it would
appear that such an industry must either be unable to meet
the competition of the imported goods, or must, through the
economy of production on a large scale, be able to underbid
the imports. If an equilibrium is established, it possesses
the characteristic of instability. Suppose, for example, that
a division of the market between domestic and imported
products is established, the price secured covering domestic
expenses of production and the expenses of importation of
the foreign product. A diminution of the domestic scale of
production would, in the case supposed, mean an increased
cost of production, and thus a diminished capacity for holding
 the market in competition with the imported goods.
The logical result would be the gradual extinction of the
domestic manufacture, unless the supply of the foreign
product could be increased only at an increase of cost in
as great or greater proportion than the increase in the
domestic cost. In this latter case, a new equilibrium would
result at some scale of supply less than the former. The
condition for this is seen to be that the domestic industry is
affected by increasing returns, while the same industry, in
the countries supplying the imports, is affected by decreasing
returns.