354

LU

INTERNATIONAL TRADE

for the United States would show a fall, whereas under specie
conditions the same train of influences would cause the same sort
of index number to show a rise. In Great Britain, on the other
and, a rise in prices would be shown, as against a fall under specie.
This apparently anomalous conclusion arises from the fact that
in the United States the sum total of physical goods, and so the
volume of trade in terms of units of transactions, becomes larger.
There are more imported goods than before. More goods are
etained for domestic consumption than before, since exports are
ess. On the other hand, the total money income is the same as
before. There is a larger supply of imported goods; and there
are more domestic goods (or services), too, since more of the counry’s
 labor is given to making them than before. Domestic goods
(including those exported) will be unchanged in price, but imported
goods will be cheaper. The price level for all goods shows a
decline. The people of the United States have the same money
incomes as before, but can buy more goods. In other words, they
et the gain from the better terms of foreign trade in that concrete
orm in which alone any real gain at all can be got: by having
more commodities for their labor. And conversely in Great
a There, while the total of money incomes is the same as
it was before the change in the conditions of foreign trade set in,
BE are less in quantity. There are less imported goods, less
too of domestic goods. Prices of imported goods are higher.
wi the same money incomes, the people of Great Britain will
e able to buy fewer goods.!

~ 1 The general train of reasoning followed in the text was developed in a paper
which I published in the Quarterly Journal of Economics, May, 1917. In that
paper, however, I said (pp. 397-398) that in the United States, in such a case as
has been supposed, there would ultimately be a fall in the prices of domestic goods
as well as of imported. This proposition appears to me on further reflection unsound.
 The accurate solution, 7.e. that based on unrelenting theoretical reasoning,
would seem to be that the fall in price is confined to imported goods only, and
that it is the lower prices of these alone that lead to the decline in the general price
level and to the greater purchasing power of the stable money incomes. bh
This solution seems to me to follow from the constancy of total money income,
which points to constancy in money wages and in all the money expenses of production.
 Individual money prices of domestic goods will remain unchanged, as
do the expenses of production. The proportion of the total money income which is
spent on purely domestic goods may become greater or less than before, this depending
 on the elasticities of demand for these goods and for the imported goods.