§ I. Benefits of international trade. § 2. Erroneous views of benefits. § 3. Relatively advantageous industries. § 4. Persistence of differences between nations. § 5. Doctrine of comparative advantages. § 6. Advantages confused with monetary costs. § 7. Equation or international exchange. § 8. Balance of merchandise movements. § 9. Cancelation of foreign indebtedness. § 10. Par of exchange. §11. International monetary balance and price levels.

§ 1. Benefits of international trade. International trade is carried on by individual traders in any two countries. "What motive impels men to trade across the political boundaries of a state ? The simple answer is that each trader has something to give and desires to get something in return. Each is seeking to get something that has to him a greater value than the thing he gives, and he believes he can do this in trade with a foreigner better than by trading at home. In any trade, both parties gain, or think they are gaining.1 In international trade there is the same chance for mistake as in domestic trade, but no more. In a single transaction in either domestic or foreign trade one party may be cheated, but the continuance of trade relations is dependent upon continued benefits. The once generally accepted maxim that the gain of one in trade is the loss of another is now generally rejected, but often still it is assumed to be true of international trade. The starting-point for the consideration of this subject is in this proposition: Foreign trade is carried on by individuals, for individual gain, with the same motives and for the same benefits as are found in other trade.

1 See Vol. I, ch. 5, § 1 and § 7.

The advantages of international trade are indeed but those of division of labor in general, in the particular case where it happens to cross political boundaries. The great territorial divisions of industry are determined first and mainly by natural differences of climate, soil, and material resources. Thus trade arises easily between North and South, between warm and frigid climates, between new countries and old, between regions sparsely and regions densely populated.2

Territorial divisions of industry are determined, secondly, by social and economic differences such as those with respect to accumulation of wealth, amount of lendable capital, invention, organization and intelligence of the workers, and the grade of civilization.

§ 2. Erroneous views of benefits. Certain erroneous explanations of the advantages of foreign trade may be dismissed with brief mention. It is said to give vent for surplus production and to give a wider market to what would otherwise go to waste. This involves the same fallacy as the "lump of labor notion," the destruction of machinery, and the praise of waste and luxury.3 If it were true that sale to backward nations were now necessary to give an outlet for products that would otherwise rot in the warehouses, a time would come at length when the world would have an enormous surplus unless neighboring planets could be successively annexed. Again it is said that the great purpose of foreign trade is to keep exports in excess of imports, so that the money of the country may constantly increase in amount. The ideal of such theorists is an impossible condition where the country would constantly sell and never buy.4 In the narrow commercial view of the subject the sole object of foreign trade is to afford a profit to the merchants, regardless of the welfare of the mass of the citizens.

§ 3. Relatively advantageous industries. Foreign trade normally imparts increased efficiency to the productive forces of each country. In most cases it is apparent that labor is more effective and gets a larger product when it is applied in those ways for which the country is best fitted and for which it offers the best and most bountiful materials. When two countries are somewhat differently situated, such as an old country like England and a newer country like the United States in the nineteenth century, the relative advantages of various industries in the two countries are very unlike. The newer country excels in its broad area, its abundant rich lands, its bountiful natural resources of forests and mines. These are the superior opportunities that give the economic motives for settlement and for continued immigration from other lands. Most of the newcomers find it to their advantage to develop the peculiar opportunities of the new land, rather than to go on producing the same things in the same way as they did in the old country.5 Thus they get a larger quantity of products per day's labor, and are able to gain by trading a part of these for the products of the older country. Thus the characteristic industries of the two countries must differ. Further, when special branches of industry have developed at one place, they make possible the advantages of large production and of high specialization. "Without any government supervision, therefore, but simply through the choice of enterprises, each citizen seeking the best occupation and best investment of capital for himself, industries are developed in which each country is either most markedly superior, or least inferior to its neighbors. If either laborers or capitalists in the new country were to turn to the less-favored industries they would be forced to accept a smaller reward than they can earn in the more favored.

2 See Vol. I, ch. 6, § II, on the origin of markets.

3 See Vol. 1, chs. 36 and 37.

4 Recall ch. 3, in general, on the nature of monetary demand.

§ 4. Persistence of differences between nations. If both men and wealth interchanged between industries and between countries with perfect readiness and without any outlay whatever for transportation, these differences would soon disappear, and perfect equilibrium of advantage would everywhere result. In every country, in every occupation, labor and wealth of given quality and amount would receive the same reward. But the interchange of labor and of products between countries is never without friction.

5 See Vol. I for numerous statements of the effects of varying quantities of agents upon the economy of utilization; e.g., pp. 138, 163, 164, 213, 228, and chs. 34 and 35 entire.

The laborers, enterprisers, and investors in a naturally rich country are thus in a position of more or less enduring advantage relative to those of older and poorer countries. Differences of the same nature appear as between different parts of the same country, as between the northern and the southern states of the American Union, between the eastern and the western states, and even between neighboring towns in the same state. The differences between two countries, however, are likely to be more marked, the circulation of factors being so active within a country that it is allowable to speak broadly of prevailing national rates of wages, of interest, and of profit. Although, as Adam Smith said," a man is of all sorts of luggage the most difficult to be transported," the higher wages in a new country attract constantly from the older lands a portion of their laborers. The higher rate of interest in new countries constantly attracts investments from abroad; yet, despite these forces working toward equalization, the inequality may remain and, through the working of other influences, may even increase in the course of years.