How does trade make people better off?
If you had lived in the United States 200 years ago. there is a good chance you and your family. like Birkhaman. would have been much more self-sufficient. You might have grown your own food. built your own house, made your own tools, and performed many other tasks for yourself rather than relying on others.
Although self-sufficiency may be an appealing idea. it is not necessarily economically productive. In fact. societies that emphasize self-sufficiency are less productive and have a lower standard of living than those that rely on specialization and trade. Why should this be the case?
In The Wealth of Nations, Adam Smith wrote about the advantages of specialization, an approach to production in which individual workers become highly skilled at a specific task. Smith illustrated this principle by describing a pin factory.
Smith’s description illustrates the division of labor that arises from specialization. It also underscores the great efficiency and productivity that result when workers divide the individual tasks that make up a job and become expert at those specific tasks. Smith ’s pin workers were fa r more productive when each worker specialized in one step of the manufacturing process.
What was true for Smith’s pin factory in the late 1700s is also true for an entire economy today. An economy can produce more with the same inputs of land, labor, and capital when each person or business specializes in a skill or task. As productivity increases, more products and services become available to more people, and living standards rise for society as a whole.
If specialization is so great, shouldn’t all societies specialize? The answer, said Smith, has to do with population density and isolation from large markets.
He observed, for example, that specialization in the late 1700s was more developed in large British cities than in less-populated rural areas, such as the Scottish Highlands.
In the lone houses and very small villages which are scattered about in so desert a country as the Highlands of Scotland, every farmer must be butcher, baker and brewer for his own family & A country carpenter & is not only a carpenter; but a joiner, a cabinet maker, and even a carver in wood, as well as a wheelwright, a ploughwright, a cart and waggon maker.
In big cities, however, where the market for each of these jobs was large, different specialists would have performed these tasks. These workers could specialize because they knew that there were enough customers to sustain them. But markets in rural Scotland were too small, and the region too isolated, to support a range of specialists. Therefore, people had to perform a variety of tasks to earn a living and to satisfy their wants.
A similar scenario exists in Nepal, one of the most remote and isolated countries in the world. Nepal actually has a higher population density than many countries, including the United States. But the country’s rugged, mountainous terrain and relatively undeveloped transportation system limit contact among different regions and with neighboring nations. These factors make trade difficult and help keep Nepal ’s markets small, thus discouraging specialization.
The United States presents a very different picture. Even the most remote parts of this country are linked to other regions and the rest of the world through an advanced system of transportation and communications. This system promotes trade and the growth of markets and encourages the development of a highly specialized economy.
This specialization is evident in the variety of jobs performed by American workers. The U.S. Department of Labor’s Occupational Outlook Handbook lists thousands of types of jobs. These jobs range from familiar occupations like carpenter, engineer, and teacher to more specialized jobs like budget analyst, recreational therapist, and violin repairer. The people who work in these jobs are specialists, each pursuing a particular career.