You have probably heard on the news that the Japanese are U.S competitors in the world economy. In some ways, this is true because American and Japanese firms produce many of the same goods. Ford and Toyota compete for the same customers in the market for automobiles. Apple and Sony compete for the same customers in the market for digital music players.
Yet it is easy to be misled when thinking about competition among countries. Trade between the United States and Japan is not like a sports contest in which one side wins and the other side loses. In fact, the opposite is true: Trade between two countries can make each country better off.
To see why, consider how trade affects your family. When a member of your family for a job, he or she competes against members of other families who are looking for jobs. Families also compete against one another when they go shopping because each family wants to buy the best goods at the lowest prices.
So in a sense, each family in the economy is competing with all others families.
Despite this competition, your family would not be better off itself from all other families. If it did, your family would need to grow its own food, make its own clothes, and build its own home. Clearly your family gains much from its ability to trade with others. Trade allows each person to specialize in the activities he or she does best, whether it is farming, sewing, or home building. By trading with others, people can buy a greater variety of goods and services at lower cost.
Countries as well as families benefit from the ability to trade with one another. Trade allows countries to specialize in what they do best and to enjoy a greater variety of goods and services. The Japanese, as well as the French and the Egyptians and the Brazilians, are as much our partners in the world economy as they are our competitors.
Markets are usually a good way to organize Economic activity:
The collapse of communism in the Soviet Union and Eastern Europe in the 1980s may be the most important change in the world during the past half century. Communist countries worked on the premise that government officials were in the best position to determine the allocation of scarce resources in the economy. These central planners decided what goods and services were produced, how much was produced, and who produced and consumed these goods and services. The theory behind central planning was that only the government could organize economic activity in a way that promoted economic well being for the country as a whole.
Today, most countries that once had centrally planned economies have abandoned this system and are trying to develop market economies. In a market economy, the decisions of a central planner are replaced by the decisions of millions of firms and households. Firms decide whom to hire and what to make. Households decide which forms to work for and what to buy with their incomes. These firms and households interact in the marketplace, where prices and self interest guide their decisions.
At first glance, the success of market economies is puzzling. After all, in a market economy, no one is looking out for the economic well being of society as a whole. Free markets contain many buyers and sellers of numerous goods and services, and all of them are interested primarily in their own well being. Yet despite decentralized decision making and self interested decision makers, market economies have proven remarkably successful in organizing economic activity in a way that promotes overall well being.