“Trade Is Made of Win,” Part 1: Wealth Creation
“Trade is Made of Win, ” Part 1: Wealth CreationOne of the most important ideas in all of financials is that swap generates resource. Its also one of the least understood ideasin all of economics. Most people think that if two parties sell, one of them has to earn and one of them has to lose. But one of the ideas that has derived in economicsis that trade initiates wealth, and were going to see that in the purposes of the a coupleof simple examples. Consider two people, Fritz and Lou. Fritz and Lou can cause two goods. They can induce socks and they can producecorn. In a given year, Fritz could display 500 socksor 1,000 ears of corn. Lou, on the other hand, could develop 25 socksor only five ears of corn. For Fritz, every sock that he induces costshim the opportunity to produce two ears of corn. Same story for Lou. Lou could grow 25 socks or five ears ofcorn, so every sock rates him one fifth of an ear of corn. Every ear of corn penalties him five socks. Suppose that Lou comes up with an idea: Lougoes to Fritz and says, Hey, tell you what.How about you specialize in corn and Illspecialize in socks, and then Ill trade you one sock for every ear of corn yourewilling to trade me. What we want to do is compare the price atwhich they propose trading to their opportunity costs. If youre Fritz, every sock expenses the opportunityto produce two ears of corn. If Fritz is able to trade for socks, thenevery sock is only going to cost him one ear of corn. Fritz would prefer the sell. Why? Because socks are now cheaper. Lets hear what happens to Lou. If Lou is going to produce corn himself, hehas to give up five socks in order to produce that corn.If Lou transactions for corn, he only has to giveup one sock per ear of corn. Fritz, the purchasers of socks, is now able toget socks cheaper. Lou, on the other hand, is able to sell hissocks for more than he could get them for if he produced them himself. Fritz triumphs. Fritz is uttered better off. Lou wins. Lou is constituted better off. Trade is made of win or, as your economicsprofessor might have told you, swap develops capital ..