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• "Trade is Made of Win," Part 1: Wealth Creation One of the most important ideas in all of

• economics is that trade creates wealth. It’s also one of the least understood ideas in

• all of economics. Most people think that if two people trade, one of them has to win and

• one of them has to lose. But one of the ideas that has evolved in economics is that trade

• creates wealth, and were going to see that in the context of a couple of simple examples.

• Consider two people, Fritz and Lou. Fritz and Lou can produce two goods. They can produce

• socks and they can produce corn. In a given year, Fritz could produce 500 socks or 1,000

• ears of corn. Lou, on the other hand, could produce 25 socks or only five ears of corn.

• For Fritz, every sock that he produces costs him the opportunity to produce two ears of

• corn. Same story for Lou. Lou could produce 25 socks or five ears of corn, so every sock

• costs him one fifth of an ear of corn. Every ear of corn costs him five socks. Suppose

• that Lou comes up with an idea: Lou goes to Fritz and says, “Hey, tell you what. How

• about you specialize in corn and I’ll specialize in socks, and then I’ll trade you one sock

• for every ear of corn youre willing to trade me.” What we want to do is compare

• the price at which they propose trading to their opportunity costs.

• If youre Fritz, every sock costs the opportunity to produce two ears of corn. If Fritz is able

• to trade for socks, then every sock is only going to cost him one ear of corn. Fritz would

• prefer the trade. Why? Because socks are now cheaper.

• Let’s see what happens to Lou. If Lou is going to produce corn himself, he has to give

• up five socks in order to produce that corn. If Lou trades for corn, he only has to give

• up one sock per ear of corn. Fritz, the buyer of socks, is now able to get socks cheaper.

• Lou, on the other hand, is able to sell his socks for more than he could get them for

• if he produced them himself. Fritz wins. Fritz is made better off. Lou wins. Lou is made

• creates wealth.

"Trade is Made of Win," Part 1: Wealth Creation One of the most important ideas in all of

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