Understanding Transaction and Trade

In this series, we are discussing the core concepts associated with the study of economics,

and one of the most important aspects of economics is trade.

As we are probably already aware, trading simply means exchanging one thing for something

else.

This most commonly refers to a sale, where money is traded for goods or services, though

it can also refer to what we more commonly think of as a trade, like trading baseball

cards between friends or bulk goods between industrialized nations.

Every day all of us are trading, whether we realize it or not.

As we learned in an earlier tutorial, these actions are often considered trade-offs.

However, in this tutorial, let’s look at why trade itself is so important.

First, we must understand that any time you buy something, you are participating in trade.

Most of us exchange money for a good or a service.

This is called a transaction.

In a transaction, the person buying the good or service is the consumer.

The person providing the good or service in exchange for money is called the producer.

Sometimes transactions involve a middleman, sometimes called a dealer.

This is a person who buys goods from producers and turns around and sells them, either to

retailers or directly to consumers, in hopes of making a profit.

A middleman is useful if they make the producer’s job easier, or the consumer’s job easier,

or both.

For example, if an author writes a book, they might have a difficult time finding a way

to distribute the book in a way that makes it easy for consumers to buy it.

This is where a dealer comes in, whether in the form of a publisher, a bookstore, or an

online outlet.

Consumers are generally better off with fewer barriers to trade.

The more dealers that are involved in a trade, the less pleasant of an experience it will

be for both the consumer and producer.

Since each middleman takes a cut of the profit, more middlemen usually means more expensive

goods and services.

Governments can also interfere with trade.

First, governments control which goods go in and out of a country.

Imports are the goods that come in from other countries.

Exports are the goods that go out to other countries.

Countries might want to give preference to goods made at home, so they might make it

harder for consumers to have access to goods from other countries.

For example, if the United States government wants Americans to buy American-made shoes,

like those made by company A, it might place a tax on shoes made by company B, if those

shoes are imported from places like China and Vietnam.

These taxes on imports are called tariffs.