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• Preface
• Studies In the Theory of International Trade
• Chapter I: English Theories of Foreign Trade, Before Adam Smith: I
• I. Introduction
• II. “ Mercantilism” and “bullionism”
• III. the Balance-of-trade Doctrine
• IV. Reasons For Wanting More Bullion
• V. Employment and the Balance of Trade
• Chapter II: English Theories of Foreign Trade, Before Adam Smith: Ii
• I. Legislative Proposals of Mercantilists
• II. the Collapse of Mercantilist Doctrine
• III. Some Modern Interpretations of English Mercantilism
• Chapter III: The Bullionist Controversies: I. The Inflation Phase
• I. the Participants In the Controversy
• II. the Factual Background
• III. Premium On Bullion As Evidence of Excess Issue: the Bullionist Position
• IV. Qualifications Conceded By the Bullionists
• V. Possible Objections to the Bullionist Position
• VI. the Anti-bullionist Position
• VII. the Balance of Payments Argument
• VIII. the Possibility of Excess Issue By Banks
• IX. Responsibility For the Excess Issue: Bank of England Vs. Country Banks
• X. Responsibility For Excess Issue: the Credit Policy of the Bank of England
• Chapter IV: The Bullionist Controversies: II. The Deflation Phase
• I. the Resumption of Cash Payments
• II. Responsibility of Resumption For the Fall In Prices
• III. the Economic Effect of Changing Price Levels
• IV. Ricardo's Position On the Gold Standard
• V. Reform Without Departure From the Metallic Standard
• VI. Paper Standard Currencies
• Chapter V: English Currency Controversies, 1825–1865
• I. Introduction
• II. the “currency School” -“banking School” Controversy
• III. the “palmer Rule ”
• IV. the Bank Act of 1844
• V. the Possibility of Overissue of Convertible Bank Notes
• VI. the Role of Deposits, Bills of Exchange, and “credit” In the Currency System
• VII. the Technique of Credit Control
• VIII. the Relation Between Bank of England Operations and Specie Movements
• IX. Currency Reform Proposals
• Chapter VI: The International Mechanism Under a Simple Specie Currency
• I. Introductory
• II. the Mechanism According to Hume
• III. an Omitted Factor? Relative Changes In Demand As an Equilibrating Force
• IV. Prices In the Mechanism: the Concept of “price Levels ”
• V. the “terms-of-trade” Concept
• VI. the Prices of “domestic” Commodities
• VII. the Mechanism of Transfer of Unilateral Payments In Some Recent Literature
• VIII. a Graphical Examination of Pigou's Analysis 1
• IX. Some Elaborations On the Basis of Pigou's Analysis
• X. an Alternative Solution
• XI. Types of Disturbance In International Equilibrium
• XII. Specie Movements and Velocity of Money
• XIII. Commodity Flows and Relative Price Levels
• XIV. Exchange Rates
• XV. A Criticism of the Purchasing-power Parity Theory 1
• Chapter VII: The International Mechanism In Relation to Modern Banking Processes
• I. Automatic Vs. Managed Currencies
• II. Primary and Secondary Expansion of Means of Payments
• III. Short-term Loans In the International Mechanism
• IV. Primary and Secondary Expansion In Canada , 1900–13
• V. the International Mechanism and Business Cycles
• Chapter VIII: Gains From Trade: the Doctrine of Comparative Costs
• I. the Nature and Origin of the Doctrine
• II. the Division of the Gain From Trade
• III. Trade In More Than Two Commodities
• IV. Trade Between More Than Two Countries
• V. Transportation Costs
• VI. Increasing and Decreasing Costs
• VII. Prices, Money Costs, and Real Costs
• VIII. Dependence of Comparative Cost Doctrine On a Real-cost Theory of Value
• IX. Differences In Wage Rates In Different Occupations
• X. Variable Proportions of the Factors and International Specialization
• XI. Variable Proportions of the Factor and Comparative Real Costs
• XII. “ Opportunity Cost” Analysis As a Substitute For Real Cost Analysis
• Chapter IX: Gains From Trade: the Maximization of Real Income
• I. “ Mass of Commodities” and “sum of Enjoyments”: Ricardo and Malthus
• II. Reciprocal Demand and the Terms of Trade
• III. Terms of Trade and the Amount of Gain From Trade
• IV. “ Net Benefit” In International Trade: Marshall
• V. Total Net Utility Derived From International Trade: Edgeworth
• VI. the Gain From Trade Measured In Money
• Appendix: a Note On the Scope and Method of the Theory of International Trade

V. Transportation Costs

The theory of international trade is usually expounded on the assumption that there are no transportation costs, and this has occasionally been made a basis of criticism. But abstraction from transportation costs is also a common feature of the exposition of the theory of trade in a single market—“closed economy” —and such abstraction does not apear to be logically less permissible in the one case than in the other. Notwithstanding, moreover, the common assumption that transportation costs are relatively much more important in foreign than in domestic trade, it is by no means clear that such is the general situation. Cases are common where internal freight costs from producer to consumer are higher than international freight costs from producer to consumer, as can be seen from a study of the transportation item in the reports on costs of production in different countries made by the United States Tariff Commission.1 The role of transportation costs, both of products and of factors of production, in contributing to regional differences of prices is an important field for study. It has not, however, been historically the particular responsibility of the theory of international trade, and judging what has so far been done in this field, under the name of Standortslehre, it is not yet apparent, in spite of the claims of its exponents,2

that the indebtedness will be by the theory of international trade to Standortslehre rather than the other way round.

The relation of transportation costs to production costs and the terms of trade can be illustrated by chart X, a slight modification of Marshall's graphic method of dealing with foreign-trade problems. In country A a given amount of labor can produce either one unit of copper or one unit of wheat, and in country B a given amount of labor can produce either 3/2 units copper or ½ unit wheat. Country A will export wheat, and country B will export copper. In the absence of transportation costs, wheat will exchange for copper on terms within the limits of 1 wheat = 1 copper (= OA in chart) and 1 wheat = 3 copper (= OB = 3 × OA, in chart). AA′ represents the export supply curve of wheat in terms of copper of country A. BB′ represents the import demand curve of wheat in terms of copper of country B. The chart as drawn implies that in the absence of trade (or with trade on terms of 1 wheat = 1 copper) country A would consume (OA × AE) units of copper, and that in the absence of trade (or with trade on terms of 1 wheat = 3 copper) country B would consume BF wheat.

The actual transportation is assumed to be provided by the exporter. The charges for transportation are assumed to be 1 unit wheat payable in the export country for each 9 units of wheat transported and 1 unit copper payable in the export country for each 5 units of copper transported. With the transportation costs in the specified amounts, the possible limits of the terms of trade will be 1 wheat = 1.2 or Oa copper and 1 wheat = 2.7 or Ob copper. Country A's export supply curve for wheat in terms of copper will be aa′, and country B's import demand curve for wheat in terms of copper will be bb′. The equilibrium terms of trade, which would have been 1 wheat = OK copper in the absence of transportation costs, will be 1 wheat = mr copper, net after payment of transportation costs, for country A, and 1 wheat = ml copper, net after payment of transportation costs, for country B. It is to be noted that with the existence of transportation costs the terms of trade net after payment of transportation costs will be different for the two countries, the difference being absorbed in meeting the costs of transportation. Given elasticities greater than unity for both the foreign-trade curves, volume of trade will be smaller and the net terms of trade will be less favorable for both countries when there are transportation costs than when these are zero. In the present case the existence of transportation costs will reduce the amount of wheat imported by country B from OH to Om units, and will reduce the amount of copper imported by country A from (OH × OK) units to (Om × Or) units.3 The division of the costs of transportation as between the two countries will, as J. S. Mill contended, be determined by “the play of international demand.” 4

[1]Cf. also C.F. Bickerdike, “International comparisons of labor conditions,” Transactions of the Manchester Statistical Society, 1911-12, p. 77: “I suggest that if we consider the broad facts regarding the bulk of important mineral and agricultural products, it is open to question whether the average bushel of wheat, pound of meat, ton of coals or of steel has to incur much if any greater expenses of transport before it reaches the final consumer in the United Kingdom than in reaching the final consumer in the United States.”

[2]Cf., e.g., Hermann Schumacher, “Location of industry,” Encyclopaedia of the social sciences, IX (1933), 592: “[The theory of location] adds fulness to the general theory of division of labor, imparting a scientific character to discussions of international division of labor, so that it has even been termed the core of the theory of world economy.” Cf. also Alfred Weber, “Die Standortslehre und die Handelspolitik,” Archiv für Socialwissenschaft, XXXII (1911), 667-88, where the treatment of location by the theory of international trade is discussed in terms which reveal utter miscomprehension of the most elementary propositions of that theory. As to Ohlin's dictum that “The theory of international trade is nothing but internationale Standortslehre” (Interregional and international trade, 1933, p. 589), he must have in mind either a Standortslehre or a theory of international trade (or both) which has but alight resemblance to what is to be found in the existing literature bearing these labels.

[3]The transportation costs relevant here are not the total transportation costs, but only the excess, if any, of international over internal transportation costs, in each case from the point of production to the point of consumption. For example, Aa represents the excess of the amount of the copper which country A has to pay for the cost of transporting one unit of foreign copper as compared to the amount of copper which would be absorbed in meeting transportation costs of one unit of domestically produced copper. Where internal freight costs are higher than international freight costs, the range between the limiting terms of trade will be wider, and the volume of foreign trade will be greater, than if no freight costs, internal or international, existed. In fact, differences in freight costs may create a comparative advantage which in the absence of freight costs would not exist at all. For a fuller treatment of the influence of transportation costs on the terms of trade, it would be necessary, of course, to deal with transportation as representing two or more additional commodities produced under conditions of joint cost, namely, inward and outward freights and freights according to commodity.

[4]Principles, Ashley ed., p. 589.

In an obscure and patently confused argument, Sidgwick attempted to show that the existence of transportation costs of commodities provided the sole basis for a theory of international values different from the theory of domestic values. (Henry Sidgwick, The principles of political economy, 1st ed., 1883, pp. 214-30; 2d ed., 1887, pp. 202-16, in somewhat different form.) Sidgwick refuses to go behind money costs of production, and his argument, I believe, reduces itself to the proposition that the prices in any country of the products of any two (or more) countries, after allowances for transportation costs, are proportional to their money costs of production in their countries of origin, a proposition which no one would deny, and which is embodied, implicitly when not explicitly, in the classical doctrine of comparative costs instead of, as Sidgwick supposed, constituting a correction thereof. For a more extended comment, see the original version of this chapter, “The doctrine of comparative costs,” Weltwirtschaftliches Archiv, XXXVI (1932, II), 373-77.