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Specialization – the belief that some countries (or regions) are more efficient at producing some goods that are some other countries (or regions)

                                                                        Consumer electronics             Rice                

            Japan (per unit of capital)                         10 units            or               5 units             

            US (per unit of capital)                             5 units              or              10 units           

Each unit is of equal value and can be exchanged

  Both sides have consumer demand for five units of each to be consumed domestically

  What should they do?

Japan should produce 10 units of consumer electronics, sell five to the US and the purchase 5 units of rice from the US – thus having 10 units

US should produce 10 units of rice, sell five to Japan and then purchase 5 units of consumer electronics

   
Adam Smith – Wealth of Nations

  Monopolies may assist an industry, but may not improve the society

A society has a limited amount of capital  – so gov. regulation like monopolies divert the production of goods in a direction other than it would normally go

  Two big theories

            - Each individual applies their capital in the most profitable way possible

                        - The motive is self interest but the result can be beneficial to society

            - Each individual employs his capital in a manner most likely to support the domestic economy, wealth, and employment – will prefer to sell goods locally

                        - The motives are still self interest

                                    They know the laws

                                    The owner is close to their capital

                                    Transportation costs and inconvenience

The result is that the self-interested businessman enriches the society

            It’s as if he were guided by “an invisible hand”

The individual is a better judge of where their capital should be applied

            Giving that power to a politician is too dangerous – tyranny or folly could follow

Conclusion  -- if a country produces something cheaper than we do it makes sense to buy it from them and sell them what we make cheaper than they do

Free and unfettered markets will enrich the society as if the markets were guided by an invisible hand