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A TREATISE ON MONEY

BK. IV

to B or refrained from importing them unless therewas some gain in doing so. Thus, generally speaking,money-rates of earnings in B will have to fall relativelyto money-rates of earnings in A in the new position ofequilibrium as compared with the old . 1

This is usually expressed by saying that there willbe a change in the “ terms of trade ” between thecountries, adverse to country B. The change in theterms of trade is measured by the proportionatechange in the price of goods exported by B relativelyto the proportionate change in the price of goods im-ported. This ratio will not be equal to the ratio of theproportionate change in average rates of actual earn-ings in B to that in A, except in so far as there isinternal mobility of the factors of production withina country, so that their rates of remuneration indomestic-trade industries are the same as in inter-national-trade industries. Perhaps we should add that,of course, the changes in real earnings will not be sogreat as the changes in money-earnings, and also thatthe less the importance of foreign trade in a country’seconomy the less will be the change in real earnings.

Now the amount of the alteration in the terms oftrade between A and B, due to the increased attractive-ness of investment in A, is independent of the characterof the transition and of the means by which it isbrought about. It depends on non-monetary factors—on physical facts and capacities, and on the elas-ticities of demand in each of the two countries for

1 Professor Taussig has, in his International Trade, collected a good dealof evidence to show that fact bears out this theory. That is to say, whenforeign investment is increasing, the terms of trade turn against the lendingcountry and in favour of the borrowing, wages falling in the former andrising in the latter—in his terminology the gross and net barter terms oftrade tend to move in the same direction. Professor Taussig is, I think,a little too ready to assume that exports and imports adjust themselvesto the other factors in the situation, rather than—in part—the other wayround. But his treatment of the influence of international investment onthe price-levels in different countries is far in advance of any other discussionof the subject.