Smith, Malthus, Ricardo and Mill are famous economists in United Kingdom during eighteenth century and nineteenth century. The heritage and development of classical economics were well demonstrated through their concepts. Mill was born in 1806, as a junior, many of his viewpoints based on the theories by his predecessors: Smith, Malthus and Ricardo. However, there are still some differences between their perspectives. This essay will research on international trade and government. In the international trade, Mill put forward the principle of reciprocal demand.
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The theory gave an explanation on trade gains and the importance of demand in exchange rate determination. The main point is whether the trade between two countries will happen or not depends on the relative demand intensity of commodities among two or more than two trading countries. It is generated by Ricardo’s comparative advantage concepts that a country is necessary to take part in free trade even in its absolute predominance of two productions, when comparing with other countries, as long as a country’s comparative costs differentiate those of others. This distinction gives comparative advantage to every country; they will gain profits from exchanging. It is a simple example showing in the table below.
riceWheatExchange rate China10(t)15(t)1:1.5 America10(t)20(t)1:2 In china, 10 tons of rice can exchange 15 tons of wheat, however, in America it equals to 20 tons of wheat. Wheat is cheaper in America. In the other hand, 15 tons of wheat can swap 10 tons of rice in china while 20 tons of wheat is equal to 10 tons of rice. Rice is cheaper in China. These two countries both have comparative advantages in trading although china is disadvantaged in rice and wheat production. As a result, China exports rice when imports wheat and America exports wheat while imports rice. This exchange will happen when the exchange rate is between 1/1.5 and 1/2; if not there will be the situation that one country has lost the full profits meanwhile another country has gained the profit totally.
This kind of exchange will not happen in reality. Rate of exchanges between the exportable and importable goods is determined by relative demand intensity. If one country’s demand of the production is much more than the other, the gains from trade is much less. Malthus developed Mill’s theory further in geometric approach. The slope of OA is the exchange rate of domestic China: 1/1.5; the slope of OB is the exchange rate of domestic America: 1/2. The exchange rate of international trade should between them.
Smith is the early leaders of west international trade theory; he presented theory of absolute cost as the source of Mill’s thought. The absolute advantage existed when the countries differs labor productivities in producing the same merchandise, therefore formed the varieties of absolute costs, mainly because of nature and society differences. In the issue, a country will join the international trade is resulted from the absolute advantage when the country is produce a specific goods. However, the comparative advantage enlarged the range of trade. A country can benefit from another country so long as it has a relative advantage in production. Mill used the principle of reciprocal demand in profit distribution.