Trade, Exchange and Interdependence

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Definitions and Basics

    Free Market, from the Concise Encyclopedia of Economics
    Free market is a summary term for an array of exchanges that take place in society. Each exchange is undertaken as a voluntary agreement between two people or between groups of people represented by agents. These two individuals (or agents) exchange two economic goods, either tangible commodities or nontangible services. Thus, when I buy a newspaper from a newsdealer for fifty cents, the newsdealer and I exchange two commodities: I give up fifty cents, and the newsdealer gives up the newspaper. Or if I work for a corporation, I exchange my labor services, in a mutually agreed way, for a monetary salary; here the corporation is represented by a manager (an agent) with the authority to hire....
    Free Trade, from the Concise Encyclopedia of Economics
    For more than two centuries economists have steadfastly promoted free trade among nations as the best trade policy. Despite this intellectual barrage, many "practical" men and women continue to view the case for free trade skeptically, as an abstract argument made by ivory tower economists with, at most, one foot on terra firma. These practical people "know" that our vital industries must be protected from foreign competition.

    The divergence between economists' beliefs and those of (even well-educated) men and women on the street seems to arise in making the leap from individuals to nations. In running our personal affairs, virtually all of us exploit the advantages of free trade and comparative advantage without thinking twice....
    Spatial Economics, from the Concise Encyclopedia of Economics
    Producers and buyers are dispersed in space, and overcoming the distances between them can be costly. Much commercial activity is concerned with "space bridging," and much entrepreneurship is aimed at making good use of locational opportunities and cutting the costs of transport and communication. Spatial economics is the study of how space (distance) affects economic behavior....
    The Importance of Trade, at SocialStudiesforKids.com.
    Trade is simply the trading of something for something else. This can be one good for another good, one good for money, one good for a service, a service for a good, money for a service, etc. You get the idea. Trade is an exchange of things.

    Usually, people or civilizations trade things that they have too much of for things that they don't have enough of....
    Interdependence, at SocialStudiesforKids.com.
    Another of the most basic terms in the study of economics is Interdependence. It is a big word, but it means "dependent on others for some needs." In other words, you can't produce everything you need....

In the News and Examples

    Munger on Middlemen, podcast on EconTalk
    Mike Munger of Duke University talks with EconTalk host Russ Roberts about the often-vilified middleman--someone who buys cheap, sells dear and does nothing to improve the product. Munger explains the economic function of arbitrage using a classic article about how prices emerged in a POW camp during World War II. Munger then applies the analysis to the financial crisis.
    Brook on Vermeer's Hat and the Dawn of Global Trade, podcast on EconTalk
    Timothy Brook, professor of history at the University of British Columbia and author of Vermeer's Hat: The Seventeenth Century and the Dawn of the Global World, talks with EconTalk host Russ Roberts about the expansion of global trade between Europe and the rest of the world, and in particular, North American and China. He discusses the differences and similarities between Chinese and Western attitudes toward trade and exploration and the implications for innovation and knowledge.
    Don Boudreaux on Globalization and Trade Deficits, podcast on EconTalk
    Don Boudreaux, of George Mason University, talks about the ideas in his book, Globalization. He discusses comparative advantage, the winners and losers from trade, trade deficits, and inequality with EconTalk host Russ Roberts.
    Interdependence and the division of labor: I, Pencil, by Leonard Read. Also available: Audio at CommonSenseEconomics.com
    Simple? Yet, not a single person on the face of this earth knows how to make me. This sounds fantastic, doesn't it? Especially when it is realized that there are about one and one-half billion of my kind produced in the U.S.A. each year....
    Licit Globalization, by Ibsen Martinez on Econlib
    None of their forays in global economics can compare in vehemence and media impact with the utterances of Diego Armando Maradona, the famous ex-soccer player now turned into a TV talk-show celebrity as an unflagging foe of globalization....
    International Trade Agreements, from the Concise Encyclopedia of Economics
    While virtually all economists think free trade is desirable, they differ on how best to make the transition from tariffs and quotas to free trade. The three basic approaches to trade reform are unilateral, multilateral, and bilateral....
    Munger on Fair Trade and Free Trade, podcast on EconTalk
    Mike Munger, frequent guest and longtime Econlib contributor, speaks with EconTalk host Russ Roberts about fair trade coffee and free trade agreements. Does the premium for fair trade coffee end up in the hands of the grower? What economic forces might stop that from happening? They discuss the business strategy of using higher wages as a marketing strategy to attract concerned consumers. They turn to the issue of free trade agreements. If the ideal situation is open borders to foreign products, is it still worthwhile to negotiate bilateral and multilateral agreements that requires delays, exemptions and a bureaucracy to enforce? What is the cost of including environmental and various labor market regulations in these agreements?

A Little History: Primary Sources and References

    William Bernstein on the History of Trade, podcast on EconTalk
    William Bernstein talks with EconTalk host Russ Roberts about the history of trade. Drawing on the insights from his recent book, A Splendid Exchange: How Trade Shaped the World, Bernstein talks about the magic of spices, how trade in sugar explain why Jews ended up in Manhattan, the real political economy of the Boston Tea Party and the demise of the Corn Laws in England. The discussion closes with the political economy of trade today and the interaction between trade and income inequality.
    Nye on Wine, War and Trade, podcast on EconTalk
    John Nye of George Mason University talks with EconTalk host Russ Roberts about his book, War, Wine, and Taxes. The conversation covers the history of Britain and France's trade policy, why the British drink beer and why Ricardo's example of Britain trading wool for Portuguese wine is bizarre. Nye turns the traditional story on its head--he argues that France was more of a free trader than Britain and that the repeal of the Corn Laws was not the dividing line between Britain's protectionist past and free trade future. At the end of the discussion, Nye emphasizes the importance of domestic free trade for economic growth.
    Exchange, by William Stanley Jevons. Chapter 2 from the Money and the Mechanism of Exchange
    Money is the measure and standard of value and the medium of exchange, yet it is not necessary that I should enter upon more than a very brief discussion concerning the nature of value, and the advantage of exchange. Every one must allow that the exchange of commodities depends upon the obvious principle that each of our wants taken separately requires a limited quantity of some article to produce satisfaction.
    Of the Division of Labor, by Adam Smith. Book I, Chapter 1 from the An Inquiry into the Nature and Causes of the Wealth of Nations
    Those ten persons, therefore, could make among them upwards of forty-eight thousand pins in a day. Each person, therefore, making a tenth part of forty-eight thousand pins, might be considered as making four thousand eight hundred pins in a day. But if they had all wrought separately and independently, and without any of them having been educated to this peculiar business, they certainly could not each of them have made twenty, perhaps not one pin in a day; that is, certainly, not the two hundred and fortieth, perhaps not the four thousand eight hundredth part of what they are at present capable of performing, in consequence of a proper division and combination of their different operations.... [par. I.I.3]
    Of Restraints upon the Importation from Foreign Countries of such Goods as can be Produced at Home, by Adam Smith. Book IV, Chapter 2 from the An Inquiry into the Nature and Causes of the Wealth of Nations
    To give the monopoly of the home-market to the produce of domestic industry, in any particular art or manufacture, is in some measure to direct private people in what manner they ought to employ their capitals, and must, in almost all cases, be either a useless or a hurtful regulation. If the produce of domestic can be brought there as cheap as that of foreign industry, the regulation is evidently useless. If it cannot, it must generally be hurtful. It is the maxim of every prudent master of a family never to attempt to make at home what it will cost him more to make than to buy. The taylor does not attempt to make his own shoes, but buys them of the shoemaker. The shoemaker does not attempt to make his own clothes, but employs a taylor. The farmer attempts to make neither the one nor the other, but employs those different artificers.... [par. IV.2.11]

Advanced Resources

    Leamer on Outsourcing and Globalization, podcast on EconTalk
    Is outsourcing good for America? How does foreign competition affect wages in the United States? Ed Leamer, professor of economics at UCLA, talks about the effects of outsourcing on wages, jobs, and the U.S. standard of living. Drawing on a review of Thomas Friedman's The World is Flat, Leamer talks with host Russ Roberts about technology, trade, productivity and inequality.
    Studies in the Theory of International Trade, by Jacob Viner

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