Sam is the world’s most skilled brain surgeon. Sam also happens to be the world’s fastest typist. Should Sam hire a secretary to type up all the patient notes and research papers, even though the secretary will take twice as long as Sam to finish the typing?
A little reflection shows that it makes very good sense to hire the secretary to do the typing. This frees up some of Sam’s time that can be used to perform more brain surgery. The brain surgery provides more benefits to society, and pays more too.
It’s unlikely that Sam’s secretary could be re-trained as a brain surgeon, but the steady income and exposure to the industry may make it possible for the secretary’s children to take up careers in brain surgery.
The point of this little thought exercise is to serve as an analogy for international trade. Suppose that one country (“Fastonia”) is more efficient at everything than another country (“Slowdonia”). Each person in Fastonia can produce $60,000 worth of tractors per year, or $30,000 worth of Tequila per year. On the other hand, each person in Slowdonia can only produce $6000 worth of tractors per year, or $12000 worth of Tequila per year.
Should these countries trade? It’s hard to see why Fastonia shoud trade anything, because it is the most efficient at producing everything. What does it have to gain through trade? Well, look at it this way…
In Fastonia, a person can produce twice as much wealth making tractors, while a Slowdonian can produce twice as much wealth making Tequila. Suppose Fastonia trades $6000 worth of tractors to Slowdonia in return for Tequila. The Fastonians are happy to receive anything above $3000 worth of Tequila (because they can make $6000 worth of tractors for the same effort), and the Slowdonians are happy to pay anything up to $12,000 worth of Tequila (because they can make that much Tequila for the same effort as $6000 worth of tractors).
In practice, the two nations will settle on a rate of trade somewhere between these two extremes, and the people of both countries are better off than they would have been without the trade. So trade is advantageous, even when one of the countries is already best at everything.
The situation is even more compelling when one country is not so good at one of the things. Suppose the nation of Inventoria is great at inventing things but inefficient at making them, and the country of Makeany is great at making things but not good at inventing them. It then makes even more sense to trade, so that both countries can do the task that earns them the most money.
Inventing iPods in the US and making them in China comes to mind.
Two objections are commonly raised to this argument for free trade.
The first objection is that it takes time to retrain Fastonia’s workers to make tractors instead of Tequila. However changes in productivity occur very gradually. If a shift in production is allowed, it will happen gradually over the time as each new Fastonian generation sees that there is more money in tractor-making, and each new Slowdonian generation sees that there is more money in Tequila-making. Only when the less efficient task is subsidised is this natural re-balancing hindered, until eventually the subsidy becomes unsustainable and the result is massive structural unemployment.
The second objection is that a country needs to be self-sufficient in all areas of endeavour, so that it is not dependent on other countries in times of war. However, there are many smaller countries that have never produced a tractor (New Zealand comes to mind) and have not suffered for it. Broadening trade between two nations increases their friendliness and reduces the chance of hostilities breaking out.
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