How does trade make people better off?
The principle that trade makes people better off is fundamental to the economic way of thinking. Another way to state this principle is to say that trade raises our standard of living and makes us wealthier. To appreciate this, try imagining life without the volume of trade we enjoy today.
What would it be like’ You might wake up in the morning to a cold house that your family built for itself. Because there would be no gas or electricity, which is only available through trade, you would build a fire from wood you helped to gather and chop. For breakfast you would eat food that your family produced itself, perhaps in a backyard garden. Of course, you would have no appliances to cook with — no toaster or microwave — because these things also depend on trade. You would put on clothes made at home, perhaps using wool from sheep you raised. Then, unless your family owns a horse — cars and bikes are out of the question — you would probably walk to school.
This imaginary scenario gives an idea of how much harder and poorer life would be without trade.
The fact is that trade does make us wealthier. Trade does this in three main ways.
Trade can increase the value of goods, even when nothing new is produced. Think about a secondhand item you might buy at a flea market or garage sale or through an online classified ad. The fact that this item is for sale and that you are willing to buy it means that it has more value to you than to the person who is selling it. Otherwise, there would be no exchange. Trades of this kind move goods from people who value them less to people who value them more. Even though the product has merely changed hands, its value has increased.
Here is a simple example of how a voluntary exchange can increase the value of goods. Imagine that you own a baseball cap that is practically new but does not fit you. A friend of yours owns a soccer ball she no longer wants. She wants your hat and you want her soccer ball. So you trade. Why? Because you expect to be happier or better off afterward.
When we trade for things we value, our wealth increases. Most people define wealth as money and the things money can buy. But economists define wealth more broadly. Economist Michael Bade defined wealth as the total value of all the things a person owns. Notice that he did not say the total Monetary value. This implies that wealth, which is often measured in dollars and cents, can also be measured in other ways. As economist Paul Heyne pointed out, “Wealth, in the economic way of thinking. is whatever people value,” which is another way of saying that trading for a used soccer ball can make you wealthier if a soccer ball is what you really want.
At the start of this chapter, you read about Birkhaman, the jack-of-all-trades who was skilled at many jobs. In Nepal, where he lived, modern consumer goods are relatively scarce, especially in rural areas. In contrast, the United States and other highly developed nations are awash in consumer goods of all kinds. In part, this is the result of specialization, which allows us to produce more goods for our own use and for trade with other countries. This trade, in turn, gives us access to a range of goods from around the world. As a result, the quantity and variety of goods available to us is enormous. Just think about the choices you have as a consumer. I f you want to buy cheese, for example, you can go to a supermarket and choose from many different kinds. You can buy cheddar or Swiss, Brie or Colby, Monterey Jack or Camembert, and those are only a few of the choices. The variety is mind-boggling.
In Nepal, however, the selection is much more limited, particularly outside the main cities. At a store in a small village, for example, there might be just one type of cheese or perhaps none at all.
This is not to say that life in the United States is better than life in Nepal. The point is that in a specialized economy with abundant trade, the variety and quantity of goods are far greater. As a result, the society is wealthier, and most people are materially better off.
In addition to making more goods available, trade also lowers the cost of those goods. It can do this in two ways.
First, trade lowers the cost of goods by opening markets to less costly goods from other places. Countries that have a comparative advantage in the production of certain goods may be able to provide those goods to American consumers at a lower cost than American producers can.
Second, trade can lower the cost of goods by expanding markets for products. Larger markets, in turn, allow producers to take advantage of the savings that come with mass production, or large-scale manufacturing. For example, a company that produces thousands of loaves of bread each day might be able to buy its flour at a much lower cost than could a small neighborhood bakery. It can then pass those savings along to consumers by lowering the price of its bread.
Overall, nations benefit by expanding trade across their borders. This is true for both rich and poor countries. As the authors of Common Sense Economics point out,
Not everyone gains from expanding global trade. however. Cheap imports from countries with a comparative advantage may take business away from American producers and even force them out of business. When U.S. factories close, American workers lose their jobs. This is one reason why workers and communities affected by plant closings often oppose free trade.
In general. however, most economists agree that expanding trade is good for Americans and the U.S. economy as a whole. Although some people are harmed by foreign competition, most Americans benefit. Furthermore, notes economist Tim Harford,
Economists point out that as the economy changes, old jobs may be lost, but new ones are created. If producers follow the principle of comparative advantage and specialize in businesses in which their opportunity cost is lowest, the increased trade that results should produce far more winners than losers.
If trade makes people better off, what does this mean for you’ It suggests that you, too, can use comparative advantage to improve your life prospects. To find your comparative advantage, you must first decide what you like to do and can do well. If you focus on your strengths and specialize in what you do well, you will be making use of your comparative advantage and thinking like an economist.