Adam Smith’s theories were innovative and revolutionary compared to the mercantilist’s ideals that were prevalent during that time. The prevailing concept was, in order to maintain a nation’s prosperity, it was imperative to keep all money within the nation because the wealth of a nation was the money in and of itself (Butler, 2011). Because of this belief, the colonies were not allowed to trade with other countries, which created monopolies within the country. As Britain continued to tax the colonies and did not allow them to have any representation, the colonists became discontent. They should have allowed them to have representation based upon what the colonists contributed to their economy. The reason something is produced is so it can be consumed, and the consumers’ interests should be met (Butler, 2011).
Smith was proposing that it was to the country’s benefit to trade with other nations. Furthermore, wealth was not just the money within the country, but also what it was able to produce and buy annually. We know it today as “the gross national product, or GNP” (Butler, 2011). What is being bought or exchanged is a person’s labor, and that is the wealth. Money is just the tool that is used in an exchange. It gets the capital moving. Unrestricted trade “moves quickly” and creates a strong economy (Butler, 2011). A key component of efficiency is specialization; however, capital has to be accumulated before it can start and retained to continue it (Butler, 2011). Labor is divided into steps or specialized skill sets. A segment of the labor pool would specialize and only do the one part that they do most efficiently and well and cooperate with other specialists to produce a commodity (Butler, 2011). Both parties will benefit from bartering one product for another or exchanging money for it, which creates wealth in a nation (Butler, 2011). One nation is more likely to grow economically if its trading partners are also doing well economically. This applies to a particular line of work, a factory, a region of a country, or even a whole country (Butler, 2011). “Labor, capital, and land” are the three components of production. …show more content…
“Rent, wages, and profit” come together to make the natural price, or what is currently referred to as the “cost of production.” The natural price is the point at which a product is sold at a profit or loss (Butler, 2011). The law of supply and demand will determine the market price. When supply and demand match exactly, “the market clears” (Butler, 2011). When there is a surplus of a product and the price drops, the manufacturer will cut back on production to reduce their loss. As a result, quantity is less and the price will go up because the demand is greater than the supply. When manufacture of a product is profitable, production goes up and the prices will come down. This, again, clears the market (Butler, 2011). “The demand for labor can rise only when gross national product rises” (Butler, 2011). When the demand for labor goes up, the wages also tend to increase. Good wages benefit the employer and employees because the employees have a better, healthier and more productive lifestyle (Butler, 2011). “The third factor of production is land and rent is what is paid for its contribution to the national product” (Butler, 2011). It comes just from owning the land. Those who work the land and produce a commodity can produce enough to pay the rent. “A rich family consumes no more food than a poor one,” but they have the money to spend on their wants (Butler, 2011). The poor work to create the surplus so the wealthy can buy their luxury items. And so the interdependent cycle continues (Butler, 2011). All of these factors work together to produce a healthy and growing economy. However, when one group can change policies or regulate an industry or one of the factors of production, it can influence the market in a negative way for the other players in the economy. Any new regulation, tax, or tariff needs to be closely examined before being approved. Keeping the customer happy is the best way to regulate. The consumers will make the rules by their purchasing decisions (Butler, 2011). Interest is also a reflection of the economy. When
Smith was proposing that it was to the country’s benefit to trade with other nations. Furthermore, wealth was not just the money within the country, but also what it was able to produce and buy annually. We know it today as “the gross national product, or GNP” (Butler, 2011). What is being bought or exchanged is a person’s labor, and that is the wealth. Money is just the tool that is used in an exchange. It gets the capital moving. Unrestricted trade “moves quickly” and creates a strong economy (Butler, 2011). A key component of efficiency is specialization; however, capital has to be accumulated before it can start and retained to continue it (Butler, 2011). Labor is divided into steps or specialized skill sets. A segment of the labor pool would specialize and only do the one part that they do most efficiently and well and cooperate with other specialists to produce a commodity (Butler, 2011). Both parties will benefit from bartering one product for another or exchanging money for it, which creates wealth in a nation (Butler, 2011). One nation is more likely to grow economically if its trading partners are also doing well economically. This applies to a particular line of work, a factory, a region of a country, or even a whole country (Butler, 2011). “Labor, capital, and land” are the three components of production. …show more content…
“Rent, wages, and profit” come together to make the natural price, or what is currently referred to as the “cost of production.” The natural price is the point at which a product is sold at a profit or loss (Butler, 2011). The law of supply and demand will determine the market price. When supply and demand match exactly, “the market clears” (Butler, 2011). When there is a surplus of a product and the price drops, the manufacturer will cut back on production to reduce their loss. As a result, quantity is less and the price will go up because the demand is greater than the supply. When manufacture of a product is profitable, production goes up and the prices will come down. This, again, clears the market (Butler, 2011). “The demand for labor can rise only when gross national product rises” (Butler, 2011). When the demand for labor goes up, the wages also tend to increase. Good wages benefit the employer and employees because the employees have a better, healthier and more productive lifestyle (Butler, 2011). “The third factor of production is land and rent is what is paid for its contribution to the national product” (Butler, 2011). It comes just from owning the land. Those who work the land and produce a commodity can produce enough to pay the rent. “A rich family consumes no more food than a poor one,” but they have the money to spend on their wants (Butler, 2011). The poor work to create the surplus so the wealthy can buy their luxury items. And so the interdependent cycle continues (Butler, 2011). All of these factors work together to produce a healthy and growing economy. However, when one group can change policies or regulate an industry or one of the factors of production, it can influence the market in a negative way for the other players in the economy. Any new regulation, tax, or tariff needs to be closely examined before being approved. Keeping the customer happy is the best way to regulate. The consumers will make the rules by their purchasing decisions (Butler, 2011). Interest is also a reflection of the economy. When