Mill’s theory of reciprocal demand is more than a simple truism. It indicates the forces and their modus operand which bring about international equilibrium. Mill analysed the impact of changes in supply and demand conditions on the terms of trade.

1. Changes in Supply Conditions:

Changes in supply conditions as a result of cost-reducing improvements in technology bring changes in terms of trade.

An improvement in the cloth industry of England increases the productivity in that industry, makes cloth cheaper in terms of Indian wheat (i.e., the same amount of wheat is exchanged for more cloth) and thus makes the terms of trade in favour of India, the importer of cloth in exchange for wheat.

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2. Changes in Demand Conditions:

The extent to which the barter terms of trade change depends not only on the increased production in exporting country, but also on the importing country’s elasticity of demand for imports in terms of its exports.

(i) If India’s elasticity of demand for England’s cloth in terms of its own wheat is more elastic, then the barter terms of trade will change in favour of India more than the fall in price of cloth in terms of wheat.

(ii) If India’s demand for cloth in terms of wheat is unitary elastic, then the barter terms of trade turn in

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(iii) If favour of India equal to the fall in the price of cloth in terms of wheat, (ill) If India’s demand for cloth in terms of wheat is less elastic, then the barter terms of trade will change in favour of India less than the fall in the price of cloth in terms of wheat.