The Foundations of Global Trade
I’m Andy Temte and welcome to the Saturday Morning Muse! Start to your weekend with musings that are designed to improve financial literacy around the world. Today is May 3, 2025.
As mentioned at the close of last week’s episode, we’re going to start exploring the concept of money and the macroeconomy. To do this, we need to dial the clock back—way back. To get grounded we need to answer the question, “why do we trade with other nations?”
Why do we start with trade? Because trade forms the basis for currencies and macroeconomies.
To get started, we’re going to build a hypothetical economy. Here, the known world consists of two regions populated by two groups of humans that have had minimal historical interaction.
Group 1 lives on a verdant plain filled with a wide variety of plants—grains and fruit are plentiful and much of the grain/fruit that is available each year is not consumed by the humans in Group 1—there is excess capacity of grains/fruit and the supply is reliable across seasons. We’ll call this area of our hypothetical world FRUITLAND. Note that there is a limited supply of wildlife in Fruitland, but hunting is very difficult and costly, as hunting in Fruitland is risky and frequently leads to injury and death.
Group 2 lives on the other side of a daunting, but passable, mountain range which serves as a barrier that has previously separated these two groups. Group 2 resides in a wooded area that’s filled with wildlife that can be easily hunted year round, but given the terrain and soil conditions, it’s difficult to reliably grow grains, and there is very little fruit to be found due to poor growing conditions. The grain that’s naturally available to Group 2 must be stored for long periods of time and harvesting it is difficult and resource intensive. However, hunting is easy and a variety of meat sources are available throughout the year. We’ll call this area PROTEINLAND.
In this hypothetical world economy, Fruitland and Proteinland have developed independently and explorers from Fruitland have recently found a passage over the mountains and have introduced themselves to the leaders of Proteinland. We’re going to make the assumption that rudimentary, peaceful communication has been established between the two groups.
The explorers from Fruitland see the availability and excess capacity of wildlife that Proteinland has and simultaneously educates the leaders of Proteinland on the availability and excess supply of grains/fruit that are available on the other side of the mountains. Fruitland explorers had the foresight to bring some samples of fruit with them and as a goodwill gesture, have offered some fruit to the leaders of Proteinland. Proteinland leaders reciprocate and give the Fruitland explorers some meat to take back to their people.
Over time, more expeditions between the countries occur. Individuals in Fruitland begin benefiting from increased protein in their diets and individuals in Proteinland benefit from adding a reliable fruit supply to theirs. Representatives from both countries begin to see improvement in the health, life expectancy, and wellbeing in their respective populations.
Trade continues between these two countries for two primary reasons.
Societal wellbeing has increased in both countries. There is a clear net positive return from trade to the majority of both populations.
There is a clear and persistent disparity in the “cost” of production of goods in both nations. It’s really costly to produce meat in Fruitland (hunters routinely die), and fruit/grains are costly to produce in Proteinland based on storage needs, unreliable supplies, and poor growing conditions.
It should be clear that in this simple example, Fruitland enjoys an advantage in the production of grains/fruit over Proteinland, and Proteinland enjoys an advantage in the production of meat over fruitland.
Scottish philosopher and economist Adam Smith is typically credited for developing the principle of absolute advantage, and British political economist David Ricardo later developed the principle of comparative advantage. At this point in our journey, I’m not going to drag you down the rabbit hole of distinguishing between absolute and comparative advantage—what’s important right now is that each country enjoys an advantage over the other in the production of resources that individuals in both countries need for improved health and wellbeing.
On the surface, it looks like everyone wins from trade, but is it the case that everybody is happy about the trade that’s occurring? The answer in the short term is no. The hunters in Fruitland have been put out of business due to the supply of cheaper meat coming from Proteinland, and the farmers/storage facilities in Proteinland are pushed out due to the cheaper fruit and grains coming from Fruitland.
In the long term, to reduce potential unrest in both countries, hunters in Fruitland and farmers in Proteinland will need to be retrained and reskilled to perform different jobs in their respective economies. If educational opportunities are not in place, these citizens will foment unrest and conflict because they have been “left behind” by their leaders.
Hence, investments in education and training are essential ingredients to any successful trade relationship. Jobs will be disrupted with global trade. If those who are disrupted aren’t provided opportunities for growth and improvement, the benefits of trade can quickly be lost through unnecessary strife and conflict.
So, that’s where we’re going to leave it today. Next week, we’ll talk more about trade and begin to introduce the concept of currency to the simple global macroeconomy that we’ve built. Until next time…
Grace. Dignity. Compassion.
