From Ricardian Confusion To The Reciprocal Demand Theory Of Mill

In the stem of classical trade theory, David Ricardo’s trade theory of comparative cost has been occupying a very important position. However, being unable to explain the determination of international commodity exchange rate by the labor value theory, Ricardo trapped himself into confusion. This confusion also makes the classical theory of international trade face to the criticism for its validity and the questioning of its significance. Later there have been fierce debates amount scholars in analyzing the causes of, and finding the solutions for the contradiction, and once the hopes were given to the Marxist theory of international value, which was the application and development of Marxist labor value theory in international economic relations. But the problem how to determine the commodity exchange rate in international trade was still not solved fundamentally. The task of solving the Ricardian confusion ultimately falls on the shoulders of John Stuart Mill.This paper contains six chapters. Chapter 1, an introduction, briefly introduces the background of the paper topic selected, the frame and content of this paper, and also the research method used in this paper.In chapter2, the description is made of the Mercantilist and Physiocrats, tow schools pre-classic economics, their different views on the national wealth and its sources, and then the perspectives of the wealth of nation and its sources by classic economists represent by Adam Smith.Chapter3, systematically expounds Smith’s theory of division of labor, and basic viewpoints of his absolute cost theory, and then discusses deeply the close relation between international division of labor and international trade.Chapter4, based on the discussion of the relationship between the absolute cost theory and the comparative cost theory, and the characteristics by each of them, lays stress on the description of the causes of Ricardian confusion, and around which the different viewpoints raised within the academia. This chapter yet points out the incorrectness with the Marxist theory of International value, and that the problem how to determine the commodity exchange rate in international trade has not been solved yet.Chapter5, the focal part of this paper, expounds how John Mill resolves successfully the Ricardian confusion by utilizing the reciprocal demand theory and the equation of international demand, and by starting from the demand side to describe the relationship between supply and demand, and ultimately making classical trade theory system completed.Chapter6, explains how the reciprocal demands theory of John Mill is used to establish the trade equilibrium conditions, and the formation of the trade balance mechanism from the perspective of general equilibrium.This paper intends to project the significance of the reciprocal demand theory and the international demand equation, both created by Mill, in the classical trade theory system. Meanwhile, based on Mill’s theory, the formation of the trade balance conditions and the establishment of mechanisms for balance of trade are inquired.