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Microeconomics – Interdependence & Gains from Trade

Consider your typical morning… Your bed sheets are made from cotton grown in India and woven in Madeira, your alarm clock was made in China. You pour a glass of orange juice that was made from oranges grown in Spain, the year-round demand for fruits and vegetables are made possible through trade. You watch the morning news broadcast from your home city on a TV that was made in Japan. On your way to work you buy a cup of coffee which is made from Vietnamese coffee beans.

And why does this happen? Well, it happens precisely because individuals pursue their interests and specialise in what they do best. This in its own way makes you and everyone else better off. International trade can make some individuals worse off, even while it makes the country as a whole better off. Your wealth has increased, products are much more affordable and accessible. Innovation from around the globe impacts you, that may result in better healthcare to safer nations. Imports are goods produced abroad and sold domestically, while exports are good produced domestically and sold abroad.

Adam Smith in his 1776 book An Inquiry into the Nature and Causes of the Wealth of Nations, produced a detailed analysis of trade and economic interdependence, which economists still adhere to today. Interdependence is the norm because people are better off when they specialise and trade with each other. Patterns of production and trade are based upon differences in opportunity costs. Without trade economic gains are diminished. Everyone would be better off if they specailise in producing the product that they are more suited to produce and trade. This is represented in the Production Possibilities Frontier.

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