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Chapter VII: On Foreign Trade

I. Trade does not directly increase the value annually produced by a country, although itmay increase the amount, usefulness, etc. of the goods the country can consume.

o A. Because if the ability to import wine cheaply increases its quantity and drops itsprice, it also drops its value

! 1. Wine is now being produced by using English labor to produce (say)cloth and trading that for Portuguese wine

! 2. And it takes less English labor to produce wine that way than directly, so...

! 3. It has less value--in Ricardo's sense.B. It has been argued by high authority (Smith?) that when capital is shifted into

foreign commerce, the result will be to raise the rate of profit in general. But ...

! 1. The purchase of foreign commodities will employ the same, more, or lessof the produce of England's land and labor (as producing them would havebefore?).

! 2. If the same, then the same amount available for everything else.! 3. If less, then more money available to purchase domestic commidities--

and more capital to produce them.

! 4. If more, then proportionally less demand for domestic commodities, andless capital to produce them.

! 5. Putting it differently, foreign trade is simply a new technology forproducing goods, and in Ricardo's system, new technologies (save in

agriculture or necessaries for workers) do not affect the profit rate.

! 6. But note that Ricardo has assumed away the affects of changinglabor/capital ratios--which might be relevant if, as Smith argues, foreign

trade is a capital intensive industry.

C. The effect of trade is to get us more usefulness for the same value.

! 1. Which might result in more capital accumulation, if people who don'tneed to spend as much money to get the same goods save what is left,

instead of buying more goods with it.

! 2. And it could increase profits if it decreased the cost of food andnecessaries, and thus wages.

! 3. Ditto for improvements in manufacture, inland trade, etc.D. Profits depend only on wages (measured in value terms!), Prices are

independent of wages (rise in wage compensated by drop in profits) but depend on

productivity.

! 1. So an improvement in productivity benefits everyone! 2. A fall in wages benefits only the owners of capital.

II. The theory of value that explains prices within a country does not explain prices acrosscountries:

o A. Because labor and capital are mobile within a country but relatively immobileacross countries.

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o B. So profit rates and wages tend to be equal within a country but not acrosscountries.

o C. So exchange ratios in international trade are not determined by ratio ofembodied labor.

! 1. It might be profitable for Portugal to import from England cloth that cost90 man years to produce in Portugal and 100 man years in England

! 2. Because it would be sending wine, which costs 80 in Portugal, 120 inEngland.

! 3. Principle of comparative advantage first rears its head.! 4. If capital and labor were perfectly mobile, this wouldn't happen--because

they would be getting more in Portugal, and would move there.

D. Gold and silver distribute themselves among countries in such a way as to make

profitable in money terms those trades that would be profitable in barter terms.

! 1. The cloth must sell for more in Portugal, or it won't be imported, so ...! 2. Wages paid 90 men in Portugal must be more than those paid 100 men in

England (actually, cost of wages plus associated capital costs)

! 3. Which means that the value of gold in Portugal, measured in Portugueselabor, is lower than the value of gold in England, measured in English labor.

! 4. If it were not, gold would flow into Portugal (exporting both cloth andwine, importing nothing) until it was.

! 5. The specie flow mechanism for foreign trade equilibrium.! 6. If England discovered a new way of making wine that cost less than 80

man years, England would export cloth, import nothing, until enough gold

accumulated to drive the price of one of the goods in England above that in

Portugal (This version is actually Ricardo's example, the previous was myaddition).

! 7. If there is a trade imbalance, then people who buy bills of exchange inone country on another know they may not be able to trade for a bill the

other direction, so discount to allow for the cost of transporting the gold to

pay the bill.

! 8. Oddly enough, if England could make both goods cheaper (in labor), goldflowing into England and out of Portugal would make prices in general rise

in England, fall in Portugal (until a new equilibrium was reached).

III. Explanation of varying value of money in different countries:o A. If a country improves its ability to produce goods that are readily traded, gold

flows in, prices measured in gold (real gold, not Ricardo's imaginary money) are

higher.

o B. Rate of profits may be the same, wages the same, but everything measured inmoney is higher.

o C. So real money, unlike Ricardo's imaginary money, varies in value acrosscountries for this reason.

o D. But this does not imply a difference in the profit rate, which is a ratio of twoamounts of money, across countries.

o E. In the early state of society, when goods are bulky, the value of money dependsmainly on distance from the mines (think of the labor cost of growing corn,

transporting it to the mine, trading for gold, bringing the gold back).

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o F. But once one country improves its manufactures (of high value to weightgoods), now it is relative ability in manufacturing those that determines the value

of gold at home.

o G. The higher value of money will not be indicated by the exchange.! 1 That must be at par as long as you can freely import and export money,

and doing so does not cost very much.

! 2. A country that could prohibit the export of money could push up itsdomestic prices--and push the exchange against it. Must give 11 ounces inthat country to get 10 ounces abroad.

! 3. Similarly with paper money not freely convertible into gold.! 4. And an exchange against England is evidence that the currency is

depreciated--otherwise you would just export money, melt it down, and

have it coined as foreign money.