Front Page Titles (by Subject) III. Terms of Trade and the Amount of Gain From Trade - Studies in the Theory of International Trade
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III. Terms of Trade and the Amount of Gain From Trade - Jacob Viner, Studies in the Theory of International Trade 
Studies in the Theory of International Trade (New York: Harper and Brothers, 1965).
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III. Terms of Trade and the Amount of Gain From Trade
Terms of Trade as an Index of Gain from Trade.—From the beginning of the classical period, if not earlier, the trend of the commodity terms of trade has been accepted as an index of the direction of change of the amount of gain from trade, and it is therefore an old doctrine that a rise in export prices relative to import prices represents a “favorable” movement of the terms of trade. It has been recognized at times that the proposition is valid subject only to important qualifications, but systematic discussion of the qualifications which are necessary, or of the nature of the connection between the commodity terms of trade and the amount of gain from trade, seems to be almost totally lacking in the literature.
Ricardo had little to say of the terms of trade as related to the gain from trade, perhaps because the question then came up only in connection with the unwelcome arguments that by monetary expansion, or by protective duties, the commodity terms of trade of a country could be made more favorable. While Ricardo did not deny that, of itself, an increase in the amount of foreign goods obtained in return for a unit of native goods was a favorable development, he was careful to point out that whether or not it reflected a genuine improvement in the position of the country depended on how it came, or was brought, about. He was, in general, skeptical of the possibility of bringing it about deliberately, through governmental action,1 but conceded, reluctantly, that the levy of import duties might have such a result, accompanied, however, by offsetting disadvantages:
We shall sell our goods at a high money price, and buy foreign ones at a low money price,—but it may well be doubted whether this advantage will not be purchased at many times its value, for to obtain it we must be content with a diminished production of home commodities; with a high price of labor, and a low rate of profits.2
Although J. S. Mill laid much greater emphasis than did Ricardo on the connection between the terms of trade and the amount of gain from trade, he also did not accept a favorable movement of the commodity terms of trade as necessarily indicating a favorable movement of the amount of gain from trade. Thus, while he conceded that the imposition of protective import duties operated to change in a favorable direction the terms on which the remaining imports were obtained, he claimed that this advantage was more than offset by the loss of the benefit which had previously accrued from the trade in the commodities now produced at home under tariff protection.3 Similarly, when he showed that a reduction in the real cost of production of Germany's export products would operate to turn the terms of trade against Germany, he refrained from drawing the conclusion therefrom that the reduction in cost would be injurious to Germany even in the least favorable case where the commodity whose cost of production had been reduced was not consumed at all within Germany itself.4
As we shall see later, Marshall and Edgeworth both adopted changes in “consumer's surplus,” or its supposed equivalent, as a better index of change in the amount of gain from foreign trade than the movement in the commodity terms of trade. Taussig pointed out specific circumstances under which the commodity terms of trade would be a misleading index of gain from trade.5 The general position of the major writers in this field was, it seems, therefore, that an increase in the amount of imports obtained per unit of exports was presumptive evidence of an increase in the amount of gain from trade, but that the validity of the presumption was subject to the absence of countervailing factors. As examples of such countervailing factors, Marshall took account of increases in the cost of the export commodities and Taussig referred to a decrease in the desire for the import commodities. But systematic inquiry into the relationship between the commodity terms of trade and the amount of gain from trade is not, I believe, to be found in the literature.
Jevons criticized Mill's use of the commodity terms of trade as a measure of the gain from trade on the ground that the total amount of gain from trade depended on total utility, whereas the commodity terms of trade were related to “final degree of utility”: “in estimating the benefit a consumer derives from a commodity it is the total utility which must be taken as the measure, not the final degree of utility on which the terms of exchange depend.” 6 In utility terms, the total amount of gain from trade can be defined as the excess of the total utility accruing from the imports over the total sacrifice of utility involved in the surrender of the exports. If it be permitted to waive the difficulty of applying utility theory to a group of persons or a “country,” the commodity terms of trade will at any moment always equal the ratio of the marginal disutility of surrendering exports to the marginal utility of imports. Disturbances will change the terms of this ratio, but not the ratio itself. The marginal unit of trade, therefore, will never, under equilibrium conditions, yield any gain, and whether or not a “favorable” movement of the commodity terms of trade will represent an increase in net7 total utility will depend on what, if any, changes occur (1) in the utility function for imports, (2) in the disutility function for exports, (3) in the volume of trade. Reasoning such as this was presumably the basis of Jevons's comment. As will appear from the subsequent analysis, however, Jevons went further than this reasoning would justify, when he suggested that Mill's argument that the gain from trade increased with the relative cheapening of imports as compared to exports was less likely to be true than its converse, on the ground that “he who pays a high price must either have a very great need of that which he buys, or very little of that which he pays for it,” 8 a proposition whose plausibility derives from the very defect of analysis which he had charged against Mill, namely, disregard of the total utility aspects of the problem.
There follows an examination of the possibility of so modifying the concept of terms of trade as to make it less open to Jevons's criticism that it rests on a confusion of final degree of utility with total utility, although this examination is for the most part only implicitly in terms of utility analysis.
Different Concepts of Terms of Trade.—We will write e to represent the export commodities, i to represent the import commodities, P for the price index number, o for the initial year, and I for the given year. An index of the commodity terms of trade can then be represented symbolically as
where the index measures the trend of the “physical” amount of foreign goods received in exchange for one “physical” unit of the export goods, with a rise in the index indicating a favorable trend, and vice versa.9
The case cited by J. S. Mill, where a reduction in the real cost to Germany of producing her export commodities would result in a movement unfavorable to Germany of the commodity terms of trade but might nevertheless not involve a reduction in the amount of gain derived by her from her foreign trade, suffices to demonstrate that the commodity terms of trade may fail to provide a satisfactory guide even of the direction of the trend of gain from trade if, when the commodity terms of trade are changing, changes in the same direction are occurring in the costs of production of the export commodities. If it were possible to construct an index of the cost of production in terms of the average technical coefficients of production of the export commodities, and if the commodity terms of trade index was multiplied by the reciprocal of the export commodity technical coefficients index, the resultant index would provide a better guide to the trend of gain from trade than the commodity terms of trade index by itself. This modified terms of trade index, which for lack of a better name I designate as the single factoral terms of trade index, can be represented symbolically as:
represents the reciprocal of the index of cost in terms of quantity of factors of production used per unit of export, and Tc,f represents the index of the physical amounts of foreign goods obtained per unit of cost in terms of quantity of factors of production.10
A still closer approach to an index of real gain from trade would be achieved if the single factoral terms of trade index were multiplied by the reciprocal of an index of the “disutility coefficients” of the technical coefficients of the export commodities. The resultant index would be a real cost terms of trade index, which could be represented symbolically as:
represents the index of amount of disutility (amount of irksomeness) per unit of the technical coefficients, and Tc,f,r represents the index of the physical amount of foreign goods obtained per unit of real cost.
The amount of gain from trade depends, however, not only on the amount of foreign goods obtained per unit of real cost involved in the production of the export commodities, but also on the relative desirability of the import commodities as compared to the commodities which could have been produced for home consumption with the productive resources now devoted to production for export. To take account of changes in the relative desirability of the import commodities whose internal consumption is precluded by the allocation of productive resources to production for export when such changes in relative desirability are due to changes in tastes, it would be necessary to incorporate in the “real cost of trade index” an index of the relative average11 utility per unit of imported commodities and of native commodities whose internal consumption is precluded by allocation of resources to production for export. If we write U for average desirability or “utility” and a to designate the commodities whose production for domestic consumption is forgone as the result of resort to production for export, then
represents the index of relative desirability of import and forgone commodities, respectively, and the new terms of trade index, in which the index of relative desirability is incorporated, can be designated as the utility terms of trade index, and represented symbolically as
Still another terms-of-trade concept was used by the older writers, namely, the number of units of the productive services of the foreign country whose product exchanged for the product of one unit of the productive services of your own country. This concept might be designated as the double factoral terms of trade, and its index could be represented symbolically as
The older writers usually accepted the double factoral terms of trade as identical in their trend with the commodity terms of trade, which would be correct under their assumptions of production under conditions of constant costs and historically stable costs.13 But with costs variable, whether with respect to output or to time, the trends of the two indices could be substantially divergent. The double factoral terms of trade index would approach more closely to an index of the international division of gain than to an index of the absolute amount of gain for either country. If the commodity terms of trade and the index of export costs of a given country, A, remained the same, so that its single factoral terms of trade index remained unaltered, its double factoral terms of trade index would rise or fall according as the cost in the other country, B, of producing its exports rose or fell. But such divergence of the double factoral from the single factoral terms of trade index would have no welfare significance for country A, and, under the conditions stated, would merely indicate an impairment or improvement of productivity in country B.
Taussig has introduced still another concept of terms of trade, the gross barter terms of trade, or the ratio of the physical quantity of imports to the physical quantity of exports, the greater this ratio the more favorable being the gross barter terms of trade.14 His purpose in introducing this concept is to correct the commodity, or “net barter,” terms of trade for unilateral transactions, or exports or imports which are surrendered without compensation or received without counterpayment, such as tributes and immigrants' remittances. He gives an illustration where the price of wheat exported from the United States to Germany is 80 cents a bushel, and the price of linen imported into the United States from Germany is 76 ⅔ cents a yard, so that the commodity terms of trade are 10 wheat for 10.4 linen. But of the 10,250,000 bushels wheat exported by the United States only 9,000,000 bushels are exchanged for German linen and the remaining 1,250,000 bushels are sent to Germany as the commodity equivalent of a compulsory tribute of $1,000,000. The United States thus surrenders 10,250,000 bushels wheat and receives 9,400,000 yards linen, with the ratio therefore, approximately 10 bushels wheat for 9.2 yards linen. This last ratio is Taussig's gross barter terms of trade.
It is appropriate, perhaps, to make allowance in an index of gain from trade for unilateral transactions, or transactions without offsets on the other side, if such gains or losses can be properly attributed—which for most cases of unilateral transactions seems doubtful—to foreign trade as their source or occasion. 15 But to use the statistics of commodity exports and imports as the basis for calculating the gross barter terms of trade would in practice be liable to lead to seriously misleading results. Such procedure would lead to treatment as unilateral transactions of commodity exports or imports whose compensating import or export had taken place in the past—as in the case of exports whose cash proceeds are used to liquidate old indebtedness—or would take place in the future—as in the case of import surpluses constituting an import of borrowed capital—or took the form of an “invisible” import or export of services not recorded in the commodity trade statistics.16 It would seem, therefore, that, as Haberler suggests, allowance should be made separately for unilateral transactions, instead of incorporating them in the terms of trade index.
A further limitation of the terms of trade as an index of the amount of gain from trade, to which all the concepts of terms of trade differentiated above are subject, is that the terms of trade indices relate of a unit of trade and therefore fail to reflect whatever relationship there may be between the total gain from trade and the total volume of trade. But if whatever concept of terms of trade is used is accepted as a satisfactory index of the trend of gain from trade per unit of trade, multiplication of the terms of trade index by a physical index of the volume of trade will give an index of the total amount of gain from trade. For example, if we accept the commodity terms of trade as an index of amount of gain per unit of trade, and write Q for volume of trade, our index of total gain from trade would be
One advantage of a total gain index over a unit gain index would be that it would clearly show that an increase in the total amount of gain from trade was consistent with an unfavorable movement in the index of unit gain from trade if the unfavorable change in the latter was associated with an increase in the volume of trade.17
Terms of Trade and the International Division of Gain from Trade.—J. S. Mill seems to have believed that the commodity terms of trade, taken in conjunction with its comparative costs, provided a criterion of the proportions in which the total gain from the trade of a particular country with the outside world was divided between that country and the rest of the world. He did not state clearly how he would determine the proportions in any particular case, given the actual terms of trade and the two limiting sets of cost ratios, but in one illustrative case, where costs of producing cloth and linen were in the ratio of 15:10 in England and of 20:10 in Germany, and where the actual terms of trade were 10 English cloth for 18 German linen, Mill says that “England will gain an advantage of 3 yards on every 15, Germany will save 2 out of every 20.” 18 Cournot interprets this passage as postulating that England has a gain of 20 per cent and Germany a gain (or economy) of 10 per cent, although no percentages appear in Mill's text. He points out, first, as ground for rejecting this mode of measuring the comparative gain from trade of two countries, that if one of the commodities could not be produced in England at any cost the English percentage of gain from trade would be infinite. He proceeds to a further criticism on mathematical grounds, which seems to me both unimportant of itself and irrelevant to Mill's position unless it can be shown that Mill thought that England and Germany would, in his illustration, divide the gains from trade in the proportions of 20 and 10. Cournot says that it would be equally legitimate to hold that England as the result of trade gets 15 yards of linen for 8 ⅓ yards of cloth instead of for 10 yards of cloth, a saving of 16 ⅔ per cent, while Germany obtains, as the result of trade, 11 1/9 yards of cloth instead of 10 yards of cloth, for 20 yards of linen, a gain of 11 1/9 per cent. Measured this way, the ratio of the English to the German gain is 16 ⅔: 11 ⅓, instead of 20:10. “Or, les questions de calcul n'admettent pas de telles ambiguités. C'est qu'à vrai dire l'une et l'autre manière de compter sont purement arbitraires.” 19
The real difficulty lies, however, in the inadequacy of the commodity terms of trade as a criterion of amount or division of gain from trade. The fact that, given the amount of gain, it will be expressed in different percentages of gain according to what commodity is used as the base, seems to me to present a problem which is insoluble but of no consequence.20 It can be questioned also whether the proportions in which the total gains from trade are divided between two areas should be regarded as of much importance to either country, especially if the only procedures by which a country could divert to itself an increased proportion of the total gain should be such as would operate to reduce the absolute amount of gain it derives from trade—a not unlikely situation. If production is under conditions of varying costs, moreover, or if more than two commodities are involved, there will not be a single pair of comparative-cost ratios from which to compute the division of gain from trade. In the case of production under conditions of increasing cost, a situation is quite conceivable in which all the commodities which the respective countries import are also produced at home and in which, therefore, there are no comparative differences in marginal costs under equilibrium, but where a substantial gain from trade nevertheless accrues from all the infra-marginal units of trade.21 In such a case, the method of computing the division of the gain from trade by comparison of the commodity terms of trade with the comparative marginal-cost ratios would be patently absurd.
Statistical Measurement of the Trend of the Terms of Trade.—Statistical attempts to measure the trend of terms of trade for actual countries and periods have been restricted to measurements of the commodity or of the gross barter terms of trade, and chiefly to measurements of the former. The problem of statistical measurements is obviously a less formidable one for these two concepts of terms of trade than for the more complex and less objective ones examined above, but even if these simpler concepts are used the necessity of choice of index number formula to be used in computing the terms of trade index presents some difficult and in some respects insoluble problems.
The writers who have constructed statistical indices of the commodity terms of trade for particular countries and periods have made use of a wide variety of index number formulae, but have as a rule either offered no explanation of their particular choice of formula or have defended it on purely statistical grounds, such as simplicity, “reversibility,” or availability of data.22 Here, as elsewhere, it would appear that the choice of a formula should be made to depend on economic as well as on purely statistical considerations.
Let us suppose that an original static equilibrium in a particular country is disturbed by capital borrowings, that no changes occur except those resulting from the borrowings, and that the question asked is: What is the effect of the borrowings on the relative prices in the borrowing country of its export and its import commodities? Let us suppose also that the type of index number of export and of import prices which should be used in constructing the terms of trade index is a weighted aggregate index. Should the quantity weights to be used in comparing the terms of trade of a pre-borrowing with a borrowing year be those of the base, or pre-borrowing, year or those of the end, or borrowing, year?23
The proper answer depends on whether the question is asked as a question in the theory of the mechanism of international trade or as a question in the “theory of international values” or the theory of gain (and loss) from foreign trade. If the familiar proposition of the theory of the mechanism of international trade that capital borrowings tend to raise export prices relative to import prices is to be tested statistically in terms of weighted index numbers, the weights used must be the quantities exported and imported prior to the borrowings, since it is with the effect of borrowings on the relative prices of those commodities exported and imported before the borrowings that this proposition is concerned.
If what is to be tested, however, is the proposition that capital borrowings tend to improve the terms on which the borrowing country exchanges its exports for imports, the question of what type of weighting to use cannot be so readily answered. Gains to the borrowing country from the more favorable terms on which its exports are exchanged for imports can accrue only to the extent that such exchanges actually take place.24 In computing the export and import price indices for this purpose, should the prices therefore be weighted by the quantities exported or imported when the borrowings are under way, rather than by the pre-borrowing quantities?
In a closed economy, abstracting from sampling errors, the operation of the (ordinary Marshallian) elasticities of demand will tend to cause negative correlation between the relative changes in the p's and the relative changes in the q's, if the changes in the relative prices of particular commodities are due to changes in their relative costs of production, and to cause positive correlation if the changes in the relative prices are due to relative changes in demands for particular commodities. Similarly, in foreign trade, if the changes in the export prices of our country result from changes in the relative world demands for its various export commodities, then the relative changes in the export p's and the relative changes in the export q's will tend to be positively correlated, whereas if the changes in the export prices are due to changes in the internal cost conditions, the relative changes in the p's and q's will tend to be negatively correlated. Similarly, the relative changes in the import o's and the import q's will tend to be positively correlated if they result from changes in the import demands for the various import commodities, and will tend to be negatively correlated if they result from changes in the foreign costs of production of these commodities.
But price indices based on end-year weights tend to have an upward bias as compared to price indices based on beginning-year weights if the changes in the p's and the changes in the q's are positively correlated, and a downward bias if the changes in the p's and the changes in the q's are negatively correlated. In the choice of formulae to be used in constructing the price indices on which the terms of trade index as an index of gain is to be based, there is no obvious principle to follow in choosing between beginning-year and end-year weights, since neither procedure permits a wholly satisfactory comparison of the terms on which the actual exports and imports of the two years are exchanged. If the correlation between the changes in the p' and the changes in the q's has the same sign for both exports and imports, and if the same type of weighting is used for both price indices, the terms of trade index will tend to be unaffected by the choice made between weighting methods. But if the sign of the correlation between the changes in the p's and the changes in the q's is not the same for both exports and imports, or if different methods of weighting are used for the two price indices, the terms of trade index obtained for the end-year may differ substantially with differences in the choice of weighting-method.
There may be no rational basis for choice between beginning-year weight and end-year weights in constructing an index number of terms of trade where the problem consists of determining the effect of a particular disturbance on terms of trade in the “gain” sense. Comparison of the results obtained by the alternative methods of weighting in particular cases may be made, however, to serve as a check on the conclusions otherwise reached as to the nature of the disturbance. The type of correlation between the changes in the p's and the changes in the q's for the exports and the imports, respectively, and, therefore, the direction of the biases in the two price indices when based on end-year as compared to when based on beginning-year weights, should depend on the nature of the disturbance.
This reasoning can be illustrated by reference to the problem of the influence of capital borrowings on the terms of trade of the borrowing country. It has been argued above that capital borrowings tend to result in a rise in export prices and a fall in import prices in the borrowing country, not because of a relative shift in tastes whether in the world as a whole or within the borrowing country in favor of the export commodities of the borrowing country, but because of a relative rise in the money costs of production of the products of the borrowing country as compared to the commodities it imports. If this reasoning is correct, we should expect to find the changes in the export p's and q's of the borrowing country to be negatively correlated, and its export-price index number for the end-year should be higher, therefore, if beginning-year weights are used than if end-year weights are used. If the export prices had risen primarily because of a rise in the world demand for the export commodities, the reverse results should be expected. Similarly, in the case of the import commodities, we should expect capital borrowings to result in negative correlation between the changes in the p's and the changes in the q's, and the import price index number, to be higher, therefore, for the end-year when beginning-year weights are used than when end-year weights are used; whereas if the changes in the import prices had resulted primarily from changes in the tastes of the population of the capital-borrowing country, the reverse result should be expected.
In my study of the Canadian experience under heavy capital borrowings, 1900 to 1913, I found that an export price index based on beginning-year weights rose to 135.6 in the end-year, as compared to 120.2 for an export-price index based on end-year weights, and that almost without exception the commodities whose exports constituted an increased proportion of the total Canadian export trade at the end as compared to the beginning of the period were commodities whose prices had risen by less than the average rise in export prices as a whole. These results are hard to explain for a small country, which would naturally tend to push most vigorously its exports of those commodities which had risen most in price, except on the theory that the rise in Canadian export prices relative to world price levels was the result primarily of a rise in Canadian production costs. I found confirmation of this theory in the fact that in general the commodities which did not clearly reveal the restrictive effect on Canadian exports of the general upward trend of money costs in Canada were commodities whose costs, because of conditions special to these commodities such as production from newly-discovered or newly-developed natural resources, escaped in part at least the general upward trend. Lack of necessary information prevented similar analysis of the import price trends for Canada. Studies by other writers of the effect of capital borrowings or other disturbances on relative prices have not treated these problems25 and as a rule have dealt with cases where the disturbance was too small to be expected to have a clearly traceable effect on the price trends. The problem deserves further investigation, especially by the experts in index-number technique.
Cf. Ricardo, Notes on Malthus, pp. 70 ff.
Ibid., p. 76.
Essays on some unsettled questions, 1844, p. 27.
See supra, pp. 537 ff.
Cf. Taussig, International trade, 1927, pp. 117–18.
W. S. Jevons, The theory of political economy, 1871, p. 136. Cf. Edgeworth, Papers, II, 22: “It is a more serious complaint that Mill takes as the measure of the advantage which a country derives from trade, the increase in the rate of exchange of its exports against its imports. He thus confounds ‘final’ with ‘integral’ utility; ignoring the principle of ‘consumer's rent.’” Cf. also ibid., “On the application of mathematics to political economy,” Journal of the Royal Statistical Society, LII (1889), 558: “To measure the variations in the advantage accruing from trade by the variations of price—or more generally rate of exchange—is a confusion which could hardly have occurred to the mathematical economist.”
I.e., the excess of the total utility accruing from imports over the total sacrifice of utility involved in the surrender of exports.
Jevons, op. cit., p. 138.
This reverses Taussig's procedure, where a rise in the index indicates an unfavorable movement of the terms of trade. No question of principle is involved, but it seems to me to be more convenient to represent favorable movements of the indices by rising indices. The formulae which follow are so constructed that a movement of any element in the formula favorable to the country in question operates to raise the index, and vice versa.
If, when the technical coefficients of production of the exports were falling, a fall was also occurring in the actual or potential technical coefficients of home production of the import commodities, the single factoral terms of trade would send to exaggerate the trend of gain from trade by treating as a gain from trade a gain from improvement in productivity which was not dependent upon foreign trade for its realization.
“Average” and not “marginal” because, whatever changes occur, in each equilibrium situation the utility of the marginal unit of what is surrendered through export will tend to be equal, on the usual “representative individual” assumptions, to the utility of what is obtained in exchange for that marginal unit. What is really significant is the effect on total utility of foreign trade, and the terms of trade index is brought closer to a total utility index if provision is made in it for changes in average relative desirability.
The commodities whose domestic production is forgone as the result of the allocation of productive resources to production for export may be (1) the same in kind as those exported, or (2) the same as those imported, or (3) different from both. In the second case, the ratio of relative desirability of import and “forgone” commodities will, of course, always be unity, and the incorporation of a relative desirability index in the terms-of-trade index will then have no effect on the latter.
Cf. N. W. Senior, Three lectures on the value of money, 1840, p. 66: “the demand in Europe and Asia for thé produce of Mexican labor having increased, the results of a given quantity of Mexican labor would command in exchange the results of a larger quantity of European and Asiatic labor than before.” Cf. also R. Torrens, The budget, 1841–44, p. 28: “Where any particular country imposes import duties upon the productions of other countries, while those other countries continue to receive her products duty free, then such particular country draws to herself a larger proportion of the precious metals, maintains a higher range of general prices than her neighbors, and obtains, in exchange for the produce of a given quantity of her labor, the produce of a greater quantity of foreign labor.”
Cf. F. W. Taussig, International trade, pp. 113–14.
The only cleat-cut cases would be losses through defaults on trade debts, through shipwreck, or through seizure of goods by a belligerent in time of war.
Taussig points out some of these limitations in the gross barter terms of trade index when computed from statistics of commodity trade alone. Cf. ibid., pp. 119, 254. Cf. also Viner, “Die Theorie des auswärtigen Handel” in Die Wirtschaftstheorie der Gegenuart, II (1928), 121ff.; White, The French international accounts, 1933. pp. 238–41; Haberler, Theory of international trade, 1936, pp. 161 ff.
Cf. R. F. Harrod, International economics, 1933, pp. 32 ff., where this point is emphasized.
Principles, Ashley ed., p. 585.
Cournot, Revue sommaire des doctrines économiques, 1877, pp. 210 ff.
Cf., however, the comments of Edgeworth (Papers relating to political economy, 1925, II, 22, note) and Bastable (Theory of international trade, 4th ed., 1903, p. 44, note) on Cournot's criticism of Mill.
Cf. supra, p. 472.
See, however, Roland Wilson, Capital imports and the terms of trade, 1931, Chap. V, for a discussion of this problem.
I.e., should the formula used in constructing the index of the commodity terms of trade of the borrowing country be
Cf. Roland Wilson, op. cit., p. 53, note.
Roland Wilson (Capital imports and the terms of trade, 1931, pp. 98–100) discusses the type of index number to be used, but without reference to the influence of capital borrowings on the nature of the bias to be expected in the price indices according to the method of weighting used. He argues that when the world prices of Australia's imports are rising, Australians will tend to increase in relatively greatest degree their imports of those commodities which rise least in price. (Ibid.) This would be a valid presumption if the changes in relative prices were due primarily to the indirect effects on money costs abroad of capital movements or were due to relative changes in the world demands for the different commodities in which changes Australia did not participate, but it would not be a valid presumption if the relative changes in import prices were due primarily to relative changes in world demands in which changes Australia did participate.