In this series, we are discussing the core concepts associated with the study of economics,
and one of the most important aspects of economics is trade.
As we are probably already aware, trading simply means exchanging one thing for something
else.
This most commonly refers to a sale, where money is traded for goods or services, though
it can also refer to what we more commonly think of as a trade, like trading baseball
cards between friends or bulk goods between industrialized nations.
Every day all of us are trading, whether we realize it or not.
As we learned in an earlier tutorial, these actions are often considered trade-offs.
However, in this tutorial, let’s look at why trade itself is so important.
First, we must understand that any time you buy something, you are participating in trade.
Most of us exchange money for a good or a service.
This is called a transaction.
In a transaction, the person buying the good or service is the consumer.
The person providing the good or service in exchange for money is called the producer.
Sometimes transactions involve a middleman, sometimes called a dealer.
This is a person who buys goods from producers and turns around and sells them, either to
retailers or directly to consumers, in hopes of making a profit.
A middleman is useful if they make the producer’s job easier, or the consumer’s job easier,
or both.
For example, if an author writes a book, they might have a difficult time finding a way
to distribute the book in a way that makes it easy for consumers to buy it.
This is where a dealer comes in, whether in the form of a publisher, a bookstore, or an
online outlet.
Consumers are generally better off with fewer barriers to trade.
The more dealers that are involved in a trade, the less pleasant of an experience it will
be for both the consumer and producer.
Since each middleman takes a cut of the profit, more middlemen usually means more expensive
goods and services.
Governments can also interfere with trade.
First, governments control which goods go in and out of a country.
Imports are the goods that come in from other countries.
Exports are the goods that go out to other countries.
Countries might want to give preference to goods made at home, so they might make it
harder for consumers to have access to goods from other countries.
For example, if the United States government wants Americans to buy American-made shoes,
like those made by company A, it might place a tax on shoes made by company B, if those
shoes are imported from places like China and Vietnam.
These taxes on imports are called tariffs.
Another way a government might limit trade is by creating a quota.
A quota is when the government creates a limit on how much of a product can be exported or
imported.
Back to the previous example, the United States could place a quota on the number of shoes
imported from company B in order to encourage more consumers to buy shoes from company A.
Both a tariff and a quota on shoes from company B will cause their prices to go up.
Meanwhile, with no barriers on the shoes from company A, their prices will be lower and
more competitive.
Later on in this series, we will go into more depth regarding what governments have specifically
done in the past when interfering with trade.
With all of these definitions understood, most economists agree that getting rid of
trade barriers is often better for both consumers and producers.
It can lead to additional competition domestic producers must face with lower cost foreign
producers, but this is roughly outweighed by the gains made by individual consumers.
In other words, in most cases it is generally better for the government to allow free trade
without barriers.
This is due to a concept called specialization, which we will examine in the next tutorial.
It’s also important to note that, while it’s ideal for all trade to be free from
interference, this is often not a practical scenario.
Still, the goal for most economies is to allow free trade as much as possible, with some
nuance that will be investigated later in
the series.