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Smith was skeptical of government attempts to divert resources from the course of employment
chosen by individual resource owners. Quoting Smith:
“…which produce is likely to be of the greatest value, every individual, it is evident, can, in his
local situation, judge much better than any statesman or lawgiver can do for him. The
statesman, who should attempt to direct private people in what manner they ought to employ
their capitals, would not only load himself with a most unnecessary attention, but assume an
authority which could safely be trusted, not only to no single person, but to no council or
senate whatever, and which would nowhere be so dangerous as in the hands of a man who
had folly and presumption enough to fancy himself fit to exercise it.”
Instead of restraining trade, nations should behave like prudent householders. Quoting Smith:
“It is the maxim of every prudent master of a family, never to attempt to make at home what it
will cost him more to make than to buy…What is prudence in the conduct of every private
family, can scarce be folly in that of a great kingdom. If a foreign country can supply us with a
commodity cheaper than we ourselves can make it, better buy it of them with some part of the
produce of our own industry, employed in a way in which we have some advantage.”
In Chapter 8 of Book 4, as Smith was concluding his discussion of the mercantile system, he
wrote of the interests of the consumers versus the interests of the producers. Quoting Smith:
“Consumption is the sole end and purpose of all production; and the interest of the producer
ought to be attended to, only so far as it may be necessary for promoting that of the
consumer.”
Study Guide for Chapter 16
Chapter Summary for Chapter 16
The U.S. is the world’s largest international trader. In recent years, the U.S. has had large trade
deficits. A trade deficit occurs when a nation’s imports exceed its exports.
People in different nations trade with each other to benefit themselves. The law of comparative
advantage states that trade between nations is beneficial to both if there is a difference in
opportunity costs. Specializing and trading according to comparative advantage allows for more
production from the same amount of resources, and is a type of technological advance.
In a free market, profit-seeking will lead to production and trade according to comparative
advantage. In order for international trade to follow comparative advantage, the governments of
the nations involved need to do nothing.
Along with the gain that arises from producing and trading according to comparative advantage,
free international trade results in other benefits. Free international trade; (1) extends markets,
which allows for economies of scale and greater returns to innovation, (2) increases competition,
(3) speeds the flow of technological advances, (4) gives consumers access to more variety, and
(5) improves international relations.
Though nations benefit overall from free international trade, domestic producers who face
increased competition from imports may suffer losses. Thus, domestic producers may seek
governmentally imposed restrictions on trade, such as a tariff (a tax on an imported good) or a
quota (a legal limit on the quantity of a good that may be imported).
A trade restriction will allow domestic producers to sell a greater quantity at a higher price, thus
receiving more producer’s surplus. A trade restriction will cause domestic consumers to buy a
lesser quantity at a higher price, thus receiving less consumer’s surplus. The consumer loss
caused by trade restrictions exceeds the producer gain caused by trade restrictions. Thus, a
trade restriction causes a net loss to the nation imposing the restriction. A trade restriction will
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16 - 11 International Trade