Gainers and Losers

Although trade increases the total quantity of goods and services available to consumers, it doesn't necessarily mean that eaach individual is better off than if there had been no trade. Producers who do not have a comparative advantage will be undercut by imports from countries with a comparative advantage. Although consumers benefit, producers will sell less and earn less. Producers who have a comparative advantage will prosper and expand. Over time, resources will be reallocated and gains shared. Meanwhile, some are worse off. Losers tend to organize and seek trade barriers; consumers who benefit from trade are many but not likely to organize against trade restrictions.

Social Institutions to facilitate trade
Money - anything generally acceptable in exchange. Private property and the development of property rights Stable governments which can enforce property rights Good transportation and communication networks Markets -- arrangement that enables buyers and sellers to exchange things.

Barter
Barter refers to trading goods for goods or goods for services. Bartering requires a coincidence of wants: Someone who has desks and wants a TV must find someone who has a TV and wants a desk Cost to trade is the time and expense of finding someone whose wants coincide.

Money
Money is anything generally acceptable in exchange. Many different itmes have served as money. The form is unimportant so long as people know others will usually accept it. Should be portable, divisible, and not perishable. Currency, coins, checking deposits are money in the US today

Money reduces costs of trading
With money, a coincidence of wants is not necessary: The seller trades his goods for money and then buys what he likes from someone else using the money received from the first person. Use of money reduces the opporuntity cost of trading by reducing search time.

Property Rights

Property rights are the social arrangements that govern ownership, use, and disposal of resources and goods. Without clear definition and enforcement of property rights, goods go to those who have the power or force to take and hold onto them. Many resources are devoted to defense as individuals try to keep what's theirs. Trade is difficult when someone else may claim the good you've traded for or may try to take it by force. Stable governments can effectively police property rights; unstable ones can't be depended upon to do so (and/or may impose costs in the form of bribes

Markets
A market is an arrangement that allows buyers and sellers to exchange things. Originally, markets were physical places (like a farmer's market or the New York Stock Exchange Now "markets" refers to the arrangements for transactions: for the exchange of money for something else. Markets are voluntary: people buy or sell goods because they expect to benefit from the transactions.

Many markets

Because markets serve a useful function, they develop quickly when people see advantages to trade. They spring up without government action because they serve a useful function. Example: Ultima on-line properties (reading) Governments or others prohibit formation of markets for some other goods because they view certain transactions. Example: kidneys What are the pros and cons of allowing market sale of human kidneys? What are the alternatives?

A market economy
A market economy is one in which the operation of markets determines the answers to the 3 basic questions (what and how to produce; who gets). A circular flow diagram (see text) illustrates the operation of the market economy. Households are the basic consumer units and own directly or indirectly (shares of stock) the resources. To efficiently use specialized resources, most production takes place outside the household. Entrepreneurs organize the firm or business and acquire resources from households, thenproduce goods and services which households acquire through the product market.

Circular flow, continued
In each market there is an exchange of real items for money In the factor market, real resources (labor, capital, land, etc.) are exchanged for money wages, rent, interest, and profit. In the product market, households spend their income, exchanging their money income for goods and services.

Market Transactions Allocate Resources
The dollars exchanged are, in essence, dollar votes for the production of certain goods. Goods which get enough votes are produced; others are not. Who gets the goods depends on how many resources each household owns, the number of "dollar votes" by firms for those resources, and how much each household values the different goods (how much they are willing to sacrifice to get the good).