Arthur I. Bloomfield

Effect of Growth on the Terms of Trade: Some Earlier Views

There seems to be a rather widely held view that the effects of technical change on the terms of trade were first analysed by John Stuart Mill. Findlay (1981, p. 427), in fact, says so quite explicitly: Mill was ... the first economist to consider the effects of technical improvements on the terms of trade. In similar vein, Johnson (1963, p. 97) had earlier noted that Classical analysis of the effects of technical change on trade begins and very nearly ends with J. S. Mills analysis of the effects of improvements in the methods of production [on the terms of trade]. Caves (1960, p. 152) and Batra (1973, p. 128), in referring to earlier writings on this subject, mention Mill, Edgeworth and Bastable, but no one before Mill. Despite the prevalence of this view, a number of nineteenth-century writers before Mill did in fact consider rather briefly the effect of technical changeand/or increases in factor supplies-on the terms of trade. It is the purpose of this note to call attention to some of these earlier contributions regarding the effect of growth on the terms of trade in an attempt to fill a minor gap in the history of trade theory.1 None of these contributions, however, was on the order of that of Mill, although at least one, and perhaps two, of the writers involved anticipated the concept of immiserizing growth, which was only latent in Mills analysis.2 Mills analysis, it will be recalled, first involved the case of a technical improvement in a country creating a new export product which foreigners were assumed to substitute for a commodity that they had previously been producing at home. The increased foreign demand, according to Mill, would necessarily turn the terms of trade in favour of the improving country; foreigners would benefit from the new product but would pay more for their other imports from that country. In the case of an improvement lowering the cost of an existing export product, however, Mill argued that the terms of trade would turn against the improving country, and in a proportion greater or less than that of the cost reduction, depending on whether the foreign elasticity of demand for the cheapened product was less or greater than unity (Mill, 1848, II, pp. 134-8).3 Modern analyses of this broad problem, dating from the article by Hicks (1953), have of course gone much further than Mill and have greatly widened the range of theoretical possibilities of the effect of growth on the terms of trade. By way of introduction, it might be noted that the classical economists in general viewed economic growth as propelled mainly by capital accumulation and population increase, with technical change being assigned only a lesser role. Indeed, they never developed a systematic theory of technical change, although they discussed many of its aspects. For example, they debated the