JO
INTERNATIONAL TRADE
The price situation is simple. Wheat is produced more cheaply
in the United States than in Germany — $1.00 in the United States
and $1.50 in Germany. Cloth is produced more cheaply in Ger-
many — $0.83% there as compared to $1.00 in the United States.
Linen, however, has the same money cost of production in both
countries; namely, $1.00. Wheat moves from the United States to
Germany. Cloth moves from Germany to the United States.
Linen moves neither way; each country produces for itself the
linen that it consumes.
The barter terms of trade into which these prices ($1.00 for
American wheat, $0.83% for German cloth) resolve themselves, are
10 of wheat for 12 of cloth. On these terms, it is a matter of indif-
ference to Germany whether for the 10 of American wheat she
exchanges 10 of her linen or 12 of her cloth since in Germany 10
linen is equal to 12 cloth. For the United States, however, it is
more advantageous to take the 12 German cloth in exchange for her
own wheat inasmuch as in the United States 10 linen is equal to
only 10 of cloth. In this case, therefore, the American situation
would be decisive, and American wheat would flow to Germany
and German cloth to the United States.
1T have simplified these illustrations (as regards prices and money wages) by
keeping the American figures unchanged thruout, and making the variations for
German figures only. It is hardly necessary to say that the three cases, as here set
forth, are not designed to show successive stages, the later of which develop from
the earlier. If it were desired to illustrate the several stages by which the situation
of Case 1 is transformed by a change of demand into Case 2, the procedure would
be to trace the flow of specie from the United States to Germany, the rise in wages
and domestic prices in Germany, the corresponding fall in the United States, and
soon. The outcome would be a set of figures differing from those of the text, money
wages becoming lower in the United States at the same time as they become higher
in Germany. But the same relations between the two countries would be found.
It has seemed to me superfluous to follow the suppositions thru in the more meticu-
lous way. The reader who. may be interested will readily do so for himself.
The equilibrium of international payments in all these cases will be reached when
the total money sums due from the two countries to each other are the same. It
is the amount which the Americans are ready to pay for cloth and linen, as com-
pared with that which the Germans are ready to pay for wheat; or the amount
which the Germans are ready to pay for wheat and linen a3 compared to what the
Americans are ready to pay for cloth — these are the determinants of the character
and the volume of the trade between them. It is superflous to present illustrative
figures, since these would be no more than variants of illustrations already worked
out in the preceding pages for similar situations.
