Unequal exchange is a Marxist argument that illustrates how an exchange of different commodities with equal value causes the group with higher wages to extract value from the group with lower wages. The argument is as follows:
Suppose Groups A and B wish to trade in unlike goods (keep in mind, unlike goods is very important to the argument). Let's say that constant capital(c), variable capital(v), and surplus value(s) are equal in this first case. For both A and B. Constant capital = 100, Variable capital = 100, and Surplus value = 100. The total value of both commodities being traded then is 300 each or 600 total value across the entire transaction. We need to determine the Price of Production(X) to get the price the goods will trade for on average. To get the Price of Production(X) for each commodity in this trade we need the Cost Price(C) for each commodity, Cost Price across the transaction (C'), and the average rate of profit across the entire transaction(P').
To get the Cost Price for each commodity we simply add Variable and Constant capital (v+c=C). For both Groups it looks like this.
100+100=C
200=CNow across the entire transaction we need Ca and Cb to be added together (Ca+Cb=C'). (Note: Due to Constant and Variable capital being equal across both I'll not do the equations again).
200+200=C'
400=C'Now we must determine the Rate of Profit(P') across this entire transaction. For that we simply add the Surplus value(s) of both together and divide by the total Cost Price(C'). That looks like this.
(100+100)/400=P'
100+100=200
200/400=P'
200/400=.5(50%)
.5=P'Now we can finally determine the Price of Production(X) for each commodity.
200+(.5200)=X
.5200=100
200+100=X
300=XBoth have the same Price of Production so I won't rewrite the equations.
This leads to a fair game 300 and 300 exchange. So far no one has lost out and everyone is walking away happy. But now we are going to alter the conditions. Let's give the workers of group A a 50% raise. This means the Variable Capital(v) of A is 150 and the Surplus value of A is now 50 (to maintain that total value hasn't changed). With just this change let's have Groups A and B exchange commodities again.
We must first find the total Cost Price(C') first. Now that A and B have different Variable capital values we have to do each's cost price separately.
Cost Price for A is Constant capital(100)+Variable capital(150).
100+150=C
100+150=250
250=CCost Price for A is 250.
Cost Price for B was done up top already and is 200.
We need Cost Price for the entire transaction now. (Ca+Cb=C').
250+200=C'
450=C'Average Rate of Profit across the transaction is the total Surplus value divided by the total Cost Price.
(100+50)/450=P'
100+50=150
150/450=⅓(33.33%)
⅓=P'Now to find each individual Price of Production we just take the Cost Price of a given commodity, multiplied by the average rate of profit across the transaction plus the Cost Price of that commodity again (Ca+(P'+Ca)=X).
250+(⅓250)=X
⅓250=83.325
250+83.325=333.325
333.325=XThis means that a good from Group A with a value of 300 will sell (in this exchange) for 333.325 units of value. Let's see what B sells for.
We already have its Cost Price and average rate of profit so we can go straight to its Price of Production.
200+(⅓200)=X
⅓200=66.667
200+66.667=X
266.667=XThis means that between these 2 groups. While both are still producing 300 worth of value, Group B sells said product at a lower price. Because commodities of different types are exchanged this means that 300 worth of value produced in Group A can get more than 300 worth of value from Group B and that 300 worth of produced by Group B is worth less than 300 value produced by Group A. Remember the value of the commodities never changed, just the variable capital (or wages) in Group A increased. Put another way, by lower its rate of exploitation Group A is able to inflate the value of goods produced. Because they trade in unlike commodities Group B isn't able to undercut the price of Group A. This is also the relationship between the 3rd and 1st world. Because the 1st and 3rd world trades different commodities with each other but the wages of the 1st world are higher. The 1st world is able to inflate the value of its goods in relation to goods produced in the 3rd and buy more of their goods for less than they are worth. By raising wages in the 1st world, the 1st is able to take more than it trades to the 3rd world.
The final implication of the argument is that this creates a labor aristocracy out of high paid workers in the 1st world that compromises with the capitalist class to extrapolate more value than they produce (reaping the benefits of the exploitation of others, especially those of the 3rd world). This labor aristocracy is marked by the higher end of middle class and up workers within a given first world country.