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News Link • Free Trade

A Basic Principle About Trade


In every trade, both sides benefit, from their own individual perspective. The reason is simple: Each side is giving up something he values less for something he values more.

That means, then, that trade, in and of itself, raises people's standard of living. At the moment of the trade, both traders are better off than they were before the trade.

Suppose Peter has 100 oranges and Paul has 100 apples. They start talking about a trade. After extensive negotiations, they enter into an agreement in which Peter gives 90 oranges to Paul and receives, in exchange, 10 apples from Paul.

At first glance, one might be tempted to say that this is a highly unfair and unequal trade. To be fair and equal, one might say, it should be 50 oranges for 50 apples.

Not so, however. What's fair is what the two parties have voluntarily agreed to. From Peter's perspective, he places a higher value on 10 apples than he does on 90 oranges. The minute the trade is made, he is better off than he was before. He has a higher standard of living, from his own subjective perspective. The same goes for Paul.

Suppose a black inner-city teenager enters into a trade in which he agrees to work for an employer for a dollar an hour. Has his standard of living gone up? Absolutely. From his own subjective perspective, he is better off than he was before the trade. We know this because otherwise he would never have entered into the trade. The benefits of learning work skills might figure into the teenager's perspective, much like what happens when students take internships that pay them no money.

It stands to reason then that the greater the opportunities for trade, the higher the standard of living.

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