Voluntary Trade: Definition, Use & Specialization in Struggling Economies

Instructor: Christopher Muscato

Chris has a master's degree in history and teaches at the University of Northern Colorado.

The global economy may seem complex, but it can be summarized as a series of individual choices. In this lesson, we'll look at how voluntary trade impacts this economy, and learn how different nations use it to their advantage.

Voluntary Trade

Last week, one of my favorite football players was traded to another team. He didn't ask to be traded; in fact, you could say he was traded involuntarily. If we think about the service he provides (tackling the quarterback) as an economic product, then this player is being forced to trade his service without controlling it. But at the end of the day, it's really just a game.

The same can't be said of global economic systems. If governments force individuals or businesses to sell their products and services, that could create many economic problems. Instead, we prefer to use a system in which individuals and businesses have the right to buy or sell products as they want, at their own discretion. We call this voluntary trade. It's the basic principle underlying the global economy. Maybe the NFL should take notes.

How It Works

So, how exactly does voluntary trade work? Well, the overall system of buying and selling is what we call the market. In a free market economy, the government does not control how products are purchased or sold. Instead, these decisions are made by the buyers and the sellers. That's where the power lies in this economic system.

Producers create a product and are free to try and sell it however, and for whatever cost, they want. It's up to the consumers, the people who purchase the products, to decide whether or not that's acceptable. If they don't like what the producer is doing, they don't buy the product and the producer has to change tactics. So the prices in a free market are set not by the government, but by supply and demand, or the relationship between how much people are willing to pay for something and how much of it is being produced.

In a free market, prices are set by supply and demand

This free market system is maintained by voluntary trade. For this to work, both producers and consumers have to be free to buy and sell products as they wish. This gives both the buyer and seller power, as opposed to a system of involuntary trade, where the government controls the economy and people are completely at the mercy of another power to set prices and the distribution of goods. The fact that both buyers and sellers have power in this system makes it great for international trade, where rich and poor nations operate in the same economy. Voluntary trade ensures, at least in theory, that poorer nations have power and control over the products they buy and sell, keeping them from being exploited by more powerful nations.

Use of Specialization

In terms of the global free market, there is one strategy in particular that has proven to be very useful to many nations with weaker economies. Rather than producing a great number of products to sell on the international market, these nations produce one or two products, but produce a lot of it and do it really well. Basically, they try to become the most important supplier of that product. This is called specialization. So instead of trying to sell a diverse range of products in a competitive market, specialization allows nations to focus all of their efforts into creating lots of demand for a single product, which they control. That way, they can increase the prices when they sell that product to richer nations. See what I mean about how the voluntary trade system gives everyone power in the economy?

Nations across Africa, Asia, and the Southwest Pacific have all developed specialized products, which they use to stay competitive in the market. This helps their struggling economies gain a little more stability and build up some wealth, and allows them to grow and change with the international market. For example, in 1992 South Korea was a highly specialized economy, focused on footwear, fabrics, and boats, in that order. A decade later, Korea's economy had grown, and specialized in passenger motorcars, telecommunications, and boats. A specialized economy gave them more control in the global market, and helped their economy.

For a time, South Korea specialized in fabrics

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