International Trade

The basic theme of this chapter is how the division of labor and specialization increase productivity and allow individuals to consumer more than they individually produce. It demonstrates that trade increases economic welfare, no less than production of new goods does. Trade is a production process that moves goods and services from people who value them less and from places where they are needed less to people who want them more and places where they are needed to a greater degree. It is as important to bring the goods to people who have the strongest preference for them as it is to produce more goods for everybody. If Smith likes chocolate cakes it’s important that more of them are produced, but also that existing ones be moved around from those who want them less to those who place a higher value on them. When Smith exchanges his pen for Jones’ wristwatch, both Smith and Jones are better off, although the total quantity of goods they both possess has not change by one iota: they together still have just a pen and a wrist watch. But they are both better off because both goods are better matched with their individual preferences.