Where, G’ stands for the potential gain. Cx stands for the labour cost/or money cost per unit of X. Cy stands for the labour cost/or money cost per unit of Y. Subscripts refer to the respective countries.
Similarly, the actual gain is measured by the difference in price ratios of the given two goods in the two countries concerned. Thus:
Where,
G stands for the actual gain. Px refers to the price of commodity X per unit. Py refers to the price of commodity Y per unit. Under perfect competition and free trade conditions:
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Thus, actual gain will tend to be equal to potential gain in the absence of tariffs or any other restrictions on the trade between two countries.
In short, conditions of free trade and perfect competition must exist for the equalisation of actual gain with potential gain. If, however, trade is not free on account of tariff imposition, and there is no perfect competition in the factor and commodity markets, the price and cost equality will not be maintained. Thus:
In reality, conditions of perfect competition and free trade are absent, therefore, actual gain always tends to be less than potential gain.