The fifth component in the cycle of prosperity model is trade. The importance of trade in creating prosperity is often not appreciated.
To help students understand trade on a localized level, some teachers involve their students in a trade game. Imagine a sixth grade class of thirty students. Each student is randomly given a gift from the Dollar Store. Students are told to rate how much they value the item they received on a scale of 0 to 10 with 10 being the highest value. They record their values. All thirty scores are added together for class wealth value.
The teacher divides the students into six groups of five and allows everyone to make trades. For example, Jose gets a Hannah Montana notepad while Lauren gets a package of baseball cards. Neither is too happy with their situation so they make a trade. After the groups of five have made their exchanges they are instructed to write down how much they value their items. The class values are added up again and invariably the score is higher, usually with everyone reporting the same previous score or higher for the item they now hold.
Finally, the teacher opens trade between all thirty students. Once again the students record their scores. The total score is usually higher both collectively and individually.
The point of the story is that no new products were made and no new resources used. There was the same set of goods at the end as there was in the beginning, yet everyone (usually) reports that their individual condition remained the same or improved, while the total value of the classroom went up. No doubt some saw no improvement and others valued items they could not obtain more than the one they ended up with but most of the group experienced an increase in value. The more freely people were able to trade with each other (free trade) the higher the wealth went.
When we move to a regional or an international level, similar positive things happen but it gets more complex. When country X is more cost effective than country Y at producing a good or service, people in country Y may be forced out of work. People in country X will experience greater income because of increased demand. People in country Y will experience reduced costs for the good or service, thus improving their standard of living. But the displaced workers in country Y will experience the trade as a loss.
The difference is that in the trading game each participant was given the item they had. They had nothing invested in its production either as stockholder or a worker. Regional and international trade often involves not just exchange of goods and services but also exchanges of jobs and industries. That almost always means there are some (at least temporary) losers in trade. Most economists agree that trade is a net positive but there is frequent debate over who loses, how much they lose, what corrective forces if any should be employed, and what are the fairest rules. Some who have no qualms about Oregon being able to lure a particular industry and its workers away from California but they raise strenuous objections when Mexico does the same. Exploring the reasons why view the two situations differently is an important reflection but it is beyond our scope here. For our purposes we will merely note the important impact that trade has on the cycle of prosperity.
Technology facilitates trade through improvement of infrastructure and the development of devices like ships, ground transport, planes, pipelines, and fiber optic cables, to name but a few. Ability to transport large quantities of goods both improves the distribution of the food supply and brings larger numbers of people into market exchange networks.
Trade with other societies increases the quantity, quality, and variety of food supplies available.
Trade with other societies results in exchanges of knowledge and ideas that can be used to improve human health and general well-being.
The formation of markets allows for greater specialization in economic behavior, thereby improving efficiency of economic growth.
Greater economic production and excess food supplies create the opportunity for trade with other societies.