CHAPTER 02

When People Trade, Both Sides Normally Win.

It’s only common sense that trade benefits both parties. After all, if it’s voluntary, both sides must be getting something out of it. But there’s more to the story: we can quantify the extent to which trade makes each side better off. We do this by establishing how much more productive a person can become through trade, given that trade allows people to specialize in what they’re good at. That’s what we’re going to learn about in this chapter.

Consider the interaction between a contractor and an architect. They each have a vital role to play in the building process. The architect designs the plans to the buyer’s specifications. The contractor is an expert at bringing the architect’s design to fruition by organizing the equipment, supplies, and labor to complete the project on time. The architect is the creative genius and the contractor is a genius at managing the construction workflow. The architect understands how to design plans that pass engineering tests and meet building codes. The contractor understands the supply chain. By specializing, each becomes more productive and gets their part of the project done faster, trading their expertise and time for monetary payment.

To help understand how trade works, we will develop our first economic model, the production possibilities frontier, so we can explore the more nuanced reasons why trade creates value.