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One of the most important ideas in all of economics is that trade creates weath. It's also one of the least understood ideas in all of economics. Most people think that if two people trade, one of them has to win and one of them has to lose. The one of ideas that is involved in economics is that trade creates wealth. Have we gonna see that in the context of the couple of simple examples. Consider two people: Fritz and Lou. Fritz and Lou can produce two goods: they can produce socks, they can produce corn. In a given year Fritz can produce 500 socks or 1000 ears of corn. Lou on the other hand can produce 25 socks or only 5 ears of corn. For Fritz every sock that he produces cost in the oportunity to produce 2 ears of corn. Same story to Lou. Lou can produce 25 socks or 5 ears of corn. So every sock cost 1/5 of an ear of corn. Every ear of corn cost in 5 socks. Suppose that Lou comes up with an idea: Lou goes to Fritz and sais: "Hey, tell you what, how about you specialize in corn and I specialize in socks. And then I'll trade you one sock for every ear of corn you are willing trade me." What we wanna do is compare the price at which they're propose trading to the opportunity costs. If you're Fritz every sock cost the opportunity to produce 2 ears of corn. If Fritz is able to trade for socks, then every sock is only gonna cost in one ear of corn. Fritz will prefere to trade. Why? 'Cause socks are now cheaper. Let's see what happens to Lou. If Lou is gonna produce corn himself, he has to give up 5 socks in order to produce that corn. If Lou trades for corn, he only has to give up one sock for ear of corn. Fritz, the buyer of socks is now able to get socks cheaper. Lou on the other hand is able to sell his socks for more then he can get them for if he produce them to himself. Fritz wins, Fritz is made better off. Lou wins, Lou is made better off. Trade is made of win or as your economic professor might told you: trade creates wealth.

Video Details

Duration: 2 minutes and 46 seconds
Country: United States
Language: English
Producer: LearnLiberty
Director: LearnLiberty
Views: 119
Posted by: smtex on Jul 29, 2011

How does trading make people better off? Economics professor Art Carden explains in this quick lesson on one of the most important concepts in Economics 101: trade creates wealth. Part 1 of 3.

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