Trade creates wealth out-of-thin-air by rearranging the pattern of goods and services to a more valuable...

Trade creates wealth out-of-thin-air by rearranging the pattern of goods and services to a more valuable pattern. Commit this phase to memory as we will use this concept frequently in understand how the world works!

Trade is what we call a positive-sum game, as opposed to a zero-sum game. (Poker is an example of a zero-sum game, where winners must be offset by losers.) Traders enter into an exchange with the expectation of some gains-from-trade, expect to be made better-off because of the trade.

Think about it...then submit an example based on your personal experience. Buying a latte at Starbucks is a classic case of gains from trade, right?

Expert Solution

Essentially in trade there are winners and no losers. For example, I import a product from abroad such as a car by paying a certain amount, I benefit as I get access to a product which was not available locally and the seller benefits because he/she gets a market for their product base. Thus I am better off because I get access to a high quality product which was not available locally and the trader benefits by gaining a monetary sum.

Buying a latte at Starbucks is a classic case of gains from trade if the high quality coffee product is not available locally and is sourced from abroad, it is also benefiting the customer and the coffee chain as because of terms of trade, he is able to gain access to the product and wealth gets generated because of this mechanism.

Thus in general there are several gains from trade and it is a positive sum game where there are no losers. However losers may arise if the local product is not getting sold because of the cheap imported product, creating joblessness in the local economy and thus generating losers.

Thus if there is voluntary trade where people are willingly doing trade and there are no subsidies, it is a positive sum game because everyone is on a level playing field and everyone benefits because of fair trade practices. Wherein trade is a positive sum game generating enormous profits.

Rahul Sunny answered 1 year ago

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