Criterion 11: Trade

In trying to make themselves better off, people naturally produce that which they can make efficiently. Then they trade their output for the many things they want but could not produce efficiently themselves. Because others are doing the same thing, voluntary exchanges make both buyer and seller better off. A good economics textbook will explain that production and trade are naturally driven by this "law of comparative advantage."

Government measures to tax trade through tariffs or restrict it with quotas or other prohibitions, hinder the flow of trade and divert resources from their most efficient uses. An exploration of the effects of trade restrictions on economic well being and growth is vital to the understanding of economics students.

An economics text should also explore the reasons governments enact trade restrictions. For example, students should be told about the role of special interest groups in seeking protective trade laws and they should be exposed to a critical appraisal of the justifications frequently given for imposing tariffs and quotas.

One of the enduring fallacies of trade concerns the so-called "trade deficit." In one sense, every individual has a "trade deficit" with the corner grocery store: Each of us buys more from that store than the owners buy from us. But as with all voluntary transactions, both sides benefit or they would not have chosen to trade in the first place.

In international trade, the same principle applies. If foreigners who earn dollars by selling to Americans do not buy American goods in return, they will purchase monetary instruments such as Treasury bills, invest in American stocks, bonds and real estate, or sell the dollars and buy other currencies. Sooner or later, those dollars come back as a "claim" on American goods or services. This "balance of payments"—a far more complete picture than the balance of trade in merchandise, since it looks at all international transactions—always balances by definition. An economics text that bemoans the balance of trade while ignoring the balance of payments is deficient in this important area.