Adam Smith's “Two Distinct Benefits” From Foreign Trade

ABSTRACT Adam Smith's two distinct benefits from foreign trade were offered to dissuade others from adopting the mercantilist view that there is one principal gain from trade: the importation of money. Although Smith's two benefits received considerable attention in the literature, there was no consensus on what Smith meant by his two benefits. This paper offers a new interpretation of those benefits. Smith's first benefit is a micro benefit, with its impact on individuals. That benefit is the subjective value creation that results from voluntary international exchange. Both parties to the exchange experience an improvement in their living standard. Smith's second benefit is a macro benefit, impacting the economy at large. International trade extends markets and allows for production on a larger scale. A greater division of labor increases labor productivity and increases the national product. This increase in aggregate production is the second benefit from foreign trade. What makes this interpretation of Smith's two benefits attractive is the evidence that Adam Smith concurs with the interpretation.