Lesson Summary
Economics is the study of voluntary trades. A “trade” happens when people exchange things they own, including their work or effort. The “voluntary” part means everyone agrees to the trade.
In a voluntary trade, both parties believe they’re walking away with something more valuable than what they gave up. This is why voluntary trade is often called a “win-win exchange.”
Both people can gain something “more valuable” because value is subjective. You’ve probably heard the saying, “Beauty is in the eye of the beholder.” Economists say that value works the same way—it’s in the mind of the beholder. For example, one child might prefer vanilla ice cream while another prefers chocolate. If they trade their ice cream dishes, each can walk away feeling they got the better treat. If value were objective, this wouldn’t work. For instance, if one ice cream dish is heavier than the other, both children can’t walk away with the heavier dish. But since value is subjective, they can both walk away with what they see as the “more valuable” option.
Voluntary trade becomes even more beneficial when new goods and services are created, not just when existing items are exchanged. This is where the concept of comparative advantage comes in. Comparative advantage refers to the activity where someone has the biggest relative advantage over others. For example, a professional athlete might be better at moving furniture than a moving company crew, but it still makes sense for the athlete to hire movers. Similarly, even if US workers can make more sweaters per hour than workers in Bangladesh, it’s smarter for the US to focus on its comparative advantages—like producing aircraft engines and wheat—and import sweaters from Bangladesh. This specialization allows workers in both countries to enjoy a higher standard of living than if they tried to produce everything themselves.
