More than Two Goods
You may have noticed that the numerical examples so far don't tell us what the price of the two goods will be in international trade. It narrows down to a range a prices -- between the prices that would be charged in the two countries if there were no trade -- and then simply speculates on a price within these limits.
This criticism was made quite early in the history of economics, and it was taken up by one of the great minds in economics (and in western thought, for that matter), John Stuart Mill. In his early work "Essays on Some Unsettled Questions of Political Economy," Mill took up the point and suggested that the exact price, within the limits of the costs in the different countries, would be determined by supply and demand.
This may seem pretty underwhelming, since modern economics holds that many price, or perhaps almost all prices, are determined by supply and demand. But Mill was writing at a time when economists still believed in the labor theory of value, that is, the hypothesis that prices were determined by labor cost -- not by supply and demand. What Mill had in mind is that international trade was an exception. But within a few years after Mill wrote, the supply and demand approach was extended to prices within the country, and, of course, became the basic theory of prices in modern economics.
In any case, we will apply the supply and demand approach to prices in international trade a bit later in this chapter, when we explore the relationships among different national currencies in international trade.
More than Two Goods
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