So No One Loses When It Comes to Trade, Right?…*Right?!*

Friday’s post taught us that trade is a good thing, and that more trade makes us better off.

The magical part is that it makes both parties better off:

This is what economists mean when they say that trade is a non-zero sum game. Trade leaves both parties better off. Both parties in this “game” win. No one loses.
And this is a surprisingly counter-intuitive idea. Sports teaches us that for one side to win, the other has to lose. Sure, draws are possible in sports, but read the sentence again. For one side to win, the other has to lose. In trade, that is not necessarily the case. Both parties can (and often do) win.
Trade is a non-zero sum game, and the more you play this game, the richer you get.

In that post, I’d used the example of why we as a family employ the services of a cook, in spite of the fact that I love to cook at home. Employing the services of the cook frees up my time, and so long as I use this time productively, I end up earning enough to both pay for the services of the cook and have a surplus left over in the bargain. The cook is better off because she has a job, I am better off because I earn more money as a consequence of paying the cook money, and so everybody wins.

In classes, I wait for this idea to sink in and say that therefore the idea that we should not buy stuff made in other parts of the world is wrong. That is, we as Indians should be buying stuff made in, say, the USA. Or Europe. Or China. Because if we don’t buy the stuff that we do from there, we must:

a) either import it from someplace else.

But we presumably weren’t importing it from someplace else because someplace else was more expensive (or of lesser quality, or both). So it probably leaves us worse off.


b) manufacture it ourselves. But that’s like me cooking instead of the cook – sure I can do it, but because that leaves me less time to do econ-prof-things, I find my family’s finances to be worse off. Similarly, the opportunity cost argument applies in the context of India too. Manufacturing it ourselves presumably means diverting resources from other things that we could have done with those resources instead. So it probably leaves us worse off.

You might say that hey, us producing this stuff instead still does mean that we are producing something. How does that not leave us better off? Well, ask yourself why you weren’t producing this thing in the first place? If you were able to do a better job job in terms of the quality of the finished product, or in terms of being able to manufacture it at a lower price, or in terms of being able to utilize inputs more efficiently (or some combination of all of these things), why weren’t you producing it all along? Proof by negation, if you like. And that is why I say that it probably leave us worse off.

So, paradoxically, not trading more with other nations leaves us worse off.

Either my blog post on Friday and my blog post today are wrong, or we should be trading more with other countries in order to be better off.

Which is it? And why?