J. S. Mill Internationl Trade Theory

John Stuart Mill International Trade Theory

Historians of economic analysis have praised Mill for his contributions to the theory of international trade. In particular, his analysis of the division of the gains from international trade among trading countries is probably his most important and lasting contribution to technical economic theory. By means of his compara­tive advantage argument, Ricardo had supported and extended Smith's analysis of the benefits of unregulated international trade. As we have seen, Ricardo argued that where comparative advantages exist, international trade will increase world output and benefit all trading economies, and that a range of international prices, or barter terms of trade, satisfactory to all the trading nations will be determined. In the simple model presented in Table 5.3, England would be willing to trade 1 yard of cloth as long as more than 2 gallons of wine was received in exchange, and Portugal would benefit by trading wine for cloth as long as less than 8 gallons of wine had to be given up to receive 1 yard of cloth. A range of prices, or barter terms of trade, between 7.9 gallons of wine for 1 yard of cloth and 2.1 gallons of wine for 1 yard of cloth would benefit both nations. Although Ricardo was able to show the gains from trade by using the comparative advantage argument, he did not indicate what the international price of wine and cloth would be, and consequently how the gains of trade would be distrib­uted between the two countries. Obviously, England would prefer to gain as much wine as possible for a yard of cloth, and Portugal would prefer to give up as little wine as possible for a yard of cloth. Ricardo had simply suggested that the terms of trade, or international price, would be roughly halfway between the two domestic prices. For the data in Table 5.3, the price would be 5 gallons of wine for 1 yard of cloth.

Mill considered how the gains from trade would be divided and gave a surprisingly correct answer, in view of the fact that he used no mathematical techniques and that the concept of elasticity was yet to be developed. Marshall and Edgeworth, who were later to present Mill's argument more precisely with the aid of mathematical and diagrammatic techniques, both acknowledged and praised Mill's contribution. Mill concluded that the terms of trade would depend on the demands for the imported products by the two countries. If, in the example just cited, England's demand for imported wine was much greater than Portugal's demand for English cloth, the barter terms and gains from trade would favor Portugal: the international price would be closer to 2 gallons of wine for 1 yard of cloth. Portugal would not have to give up much wine to get cloth. The relative strength of the demands for imports will depend on the "inclinations and circumstances of the consumers on both sides," and the international price or terms of trade will be a value such that "the quantities required by each country, of the articles which it imports from its neighbor, shall be exactly sufficient to pay for one another." Mill developed what he meant by "inclina­tions and circumstances of the consumers," indicating clearly that he was talking about the positions and elasticities of the demand curves. Although he never explicitly developed the concept of demand elasticity, he described the cases of elastic, inelastic, and unitarily elastic demand.

Mill's other contributions to trade theory were less important, but they do indicate his analytical abilities. He introduced the cost of transportation into the analysis of foreign trade and showed how transportation costs may produce situations in which trade will not occur even with differences in comparative costs. He also analyzed the influence of tariffs on the terms of trade, indicated how both price and income changes bring about trade equilibrium between countries, and showed the adjustments in trade brought about by unilateral transfer payments between countries. It was nearly one hundred years after Mill before major changes in the classical theory of international trade were made by Ohlin and Keynes.