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Chapter VII: On Foreign Trade

I. Trade does not directly increase the value annually produced by a country, although it may 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 its price, 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 ...
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1. The purchase of foreign commodities will employ the same, more, or less of the produce of England's land and labor (as producing them would have before?). 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, and less capital to produce them. 5. Putting it differently, foreign trade is simply a new technology for producing 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 changing labor/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.
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1. Which might result in more capital accumulation, if people who don't need 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 and necessaries, 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 across countries: o A. Because labor and capital are mobile within a country but relatively immobile across countries.
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B. So profit rates and wages tend to be equal within a country but not across countries. C. So exchange ratios in international trade are not determined by ratio of embodied labor. ! 1. It might be profitable for Portugal to import from England cloth that cost 90 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 in England. ! 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 Portuguese labor, 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 and wine, 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 my addition). ! 7. If there is a trade imbalance, then people who buy bills of exchange in one 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), gold flowing 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 in money is higher. o C. So real money, unlike Ricardo's imaginary money, varies in value across countries for this reason. o D. But this does not imply a difference in the profit rate, which is a ratio of two amounts of money, across countries. o E. In the early state of society, when goods are bulky, the value of money depends mainly 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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F. But once one country improves its manufactures (of high value to weight goods), now it is relative ability in manufacturing those that determines the value of gold at home. 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 its domestic prices--and push the exchange against it. Must give 11 ounces in that 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.

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