Trade, Exchange and Interdependence
Definitions and Basics
The Big Ideas of Trade, Marginal Revolution University.
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 of affairs 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. Such 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….
Marginalism, from the Concise Encyclopedia of Economics
Adam Smith struggled with what came to be called the paradox of “value in use” versus “value in exchange.” Water is necessary to existence and of enormous value in use. Diamonds are frivolous and clearly not essential. But the price of diamonds—their value in exchange—is far higher than that of water. What perplexed Smith is now rationally explained in the first chapters of every college freshman’s introductory economics text. Smith had failed to distinguish between “total” utility and “marginal” utility. The elaboration of this insight transformed economics in the late nineteenth century, and the fruits of the marginalist revolution continue to set the basic framework for contemporary microeconomics….
This lesson allows students to experience the benefits of trade that Adam Smith wrote about in An Inquiry into the Nature and Causes of the Wealth of Nations.
Students participate in a trade simulation that measures the variation in benefits received (utility) in a variety of rounds from no trade to free trade.
In the News and Examples
Trade, Exchange, and Interdependence, Video, Lesson Plan, and Quiz at EconEdLink.
Interdependence and the division of labor: I, Pencil, by Leonard Read.
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….
A Little History: Primary Sources and References
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]
Reading Guide for The Wealth of Nations at AdamSmithWorks.
The AdamSmithWorks reading guides use three types of color-coded questions to help guide readers.
Studies in the Theory of International Trade, by Jacob Viner
Vernon Smith on Markets and Experimental Economics, EconTalk, May 2007.
Vernon Smith, Professor of Economics at George Mason University and the 2002 Nobel Laureate in Economics, talks about experimental economics, markets, risk, behavioral economics and the evolution of his career.