Trade Pt. I

I would like to begin this blog with a simple discussion about the benefits of trade:

In a closed economy, where there is no trade, a market reaches an equilibrium when a market price is established through domestic competition such that the amount of goods or services demanded by consumers is equal to the amount of goods or services produced. When countries act only to their abilities, focusing production on that which they are best at producing, and engage in free trade, consumers world wide benefit. When trade occurs, a country's economy will see an increase in supply which would be impossible without trade. This increase in supply pushes the market towards a new equilibrium at a lower price.
The benefits of free trade can be easily seen through a simple example:
Consider the production schedules of two theoretical countries producing guns and butter.
Before trade, each country would produce C quantity of guns and butter resulting in a world total of 35 guns and 26 units of butter. When the countries specialize and engage in trade they produce quantity E of guns and butter resulting in a world total of 40 guns and 36 butter!
In country X the opportunity cost of 1 gun is 1/2 butter. In country Y the opportunity cost of 1 gun is 1.44 butter. This means that country X is willing and able to trade 1 gun for at least 1/2 butter and country Y is willing and able to trade at most 1.44 butter for 1 gun. This means that country X will trade 1 gun to country Y in exchange for an amount of butter between .5 and 1.44; more butter than country X would be able to produce with the resources used to create 1 gun.
So as you can see, free trade = more of a good available at a lower price.


Unfortunately there are few real life examples of truly free trade. While an economy as a whole benefits from free trade, individual firms sometimes do not. Economists look at this as a good thing; as a market functioning properly by weeding out inefficient producers. However, politicians too often look to protect domestic producers via tariffs and quotas.
I will discuss more about tariffs and quotas in a future posting...