Why Trade is Beneficial - The Ebay Way

Ebay can provide a very good illustration of why trade is good for everyone.

Let’s say I have a Coldplay t-shirt that I was given as a present, have worn once or twice, but am ashamed of and want to get rid of. As such, it isn’t worth much to me - if forced to assign a value, I might say £1. I’ve just been given a phone, though, an older model, and want a spare charger for it.

You have just upgraded your mobile phone, and are left with the old charger. It’s therefore useless to you - you might say that’s worth £1 to you too. You like bland British pop, though, so you’re looking for a Coldplay t-shirt.

I put up the t-shirt on Ebay, and you put up the phone charger. We both bid £5 for each other’s items, and exchange goods and money. Since we both bid the same amount, the amount of money in our hands has not changed. However, we’ve both gained wealth, because we both now have items worth at least £5 to us rather than £1. Thus, the total amount of wealth in the economy has gone up, and we’ve both made a profit. In other words, the transaction is win-win (as are most transactions).

Of course, there are some simplifying assumptions here:

• The market is more complex: the chance of us both being buyers and sellers on Ebay and exchanging items like this is obviously low. In fact, in the example above, we could have bartered and simply exchanged items - money is typically used just because it makes the market more liquid - it doesn’t require both of the transactions above to happen simultaneously between the same parties. If only one of the transactions above happened, the same argument would still apply: it’s simply that the seller values the item less than the money paid, and the buyer more.

• I haven’t discussed the transaction costs involved.

Hopefully this example illustrates why trade is a good thing for increasing everyone’s wealth. The corollary is that international trade is also beneficial - because there is wider scope for finding people who wish to trade and increase the net wealth. This is one reason why I support the Adam Smith Institute’s campaign to increase free trade and oppose any artificial distortion of trade boundaries or protectionism. (Incidentally, their blog is well worth reading).