VARYING COSTS; DIMINISHING RETURNS 77 
greater the German demand for wheat and the less the American 
demand for linen, the more favorable to the United States will be 
the barter terms of trade; the rate between wheat and linen will 
be nearer to the figure of 15 linen for 10 of wheat. The less the 
German demand for wheat and the greater the United States 
demand for linen, the more favorable the terms will be to Germany 
— the nearer to the figure of 10 of wheat for 10 of linen. 
The concrete way in which the conditions of exchange will work 
out will be thru the range of money incomes in the two countries. 
A rate advantageous to the United States will be attained by the 
people of that country thru their having higher money incomes, as 
well as higher domestic prices. American money incomes will be 
higher than German in any case; but the difference in favor of the 
United States will be greater or less according to the play of demand 
in the two countries for wheat and linen. They will gain as pur- 
chasers of import commodities, such as German linen. If on the 
other hand the conditions of demand should turn favorable to 
Germany, money incomes and domestic prices will be given an up- 
ward trend, and the Germans will secure a larger gain as purchasers 
of imports, such as American wheat. This is familiar matter; 
it is restated here by way of introduction to what follows. 
Suppose now that in Germany all wheat is not produced under 
the same conditions. Suppose that while 10 days produce 10 of 
wheat on some lands, there are others on which the 10 days produce 
more. Grade the lands according as the product of this constant 
amount of labor is 11, 12, 13, 14, 15 of wheat. The price of wheat 
will be in accord with its cost on the poorest land in use, that on 
which the 10 days yield but 10 of wheat. The better lands will 
vield to their owners differential returns, or economic rent. 
Under these conditions wheat growing will not cease in Germany 
after trade with the United States has set in. It would indeed cease 
if all the wheat were grown under the poorest conditions — were 
produced at the rate of 10 wheat for 10 days. Germany would then 
procure her entire supply from the United States in exchange for 
linen. But as there are varying conditions of supply within her own 
borders, she would always produce some wheat of her own. The