GISE001 Economic Analysis
ADAM SMITH
Chan Yi Kwan I54007
International Trade
TABLE OF CONTENTS
01
BIOGRAPHY
04
DIVISION OF LABOUR
02
FREE MARKET
05
GROSS DOMESTIC
PRODUCT (GDP)
03
THE INVISIBLE HAND
THEORY
06
QNA SESSION
01
BIOGRAPHY
ADAM SMITH
The Father of Modern Economics
Biography
1723: Born on June 5th in Kirkcaldy, Scotland.
1740: Enrolled at the University of Glasgow, where he
studied moral philosophy.
1751: Became a professor of logic at the University of
Glasgow.
1759: His book “The Theory of Moral Sentiments” was
eventually published.
ADAM SMITH
The Father of Modern Economics
1776: Published his most famous work, "An Inquiry into the
Nature and Causes of the Wealth of Nations," commonly
known as "The Wealth of Nations." The book laid the
foundation for modern economics and advocated for free
markets, division of labour, and limited government
intervention.
1778: Appointed as a Commissioner of Customs in Scotland,
a position he held until his death.
1790: Passed away on July 17th in Edinburgh, Scotland,
at the age of 67.
02
FREE MARKET
FREE MARKET
• Definition: A free market is one where voluntary exchange and the
laws of supply and demand provide the sole basis for the economic
system, without government intervention.
• When people and businesses make decisions based on their
willingness to pay money for a good or service, that information is
captured dynamically in the price mechanism. This, in turn, allocates
resources automatically toward the most valued ends.
• When governments interfere with this process,
unwanted shortages and surpluses tend to occur.
• Consider the massive gas shortages in the US during the 1970s.
FREE MARKET
• Although Smith advocated for a limited government, he did see the responsibilities of the
government as being limited to the defense of the nation, universal education, public works
(infrastructure such as roads and bridges), the enforcement of legal rights (property rights and
contracts), and the punishment of crime.
• Smith believed that the role of universal education was to counteract the negative and dulling
effects of the division of labour that was a necessary part of industrialization.
03
THE INVISIBLE
HAND THEORY
THE INVISIBLE HAND THEORY
• The unobservable market force that helps the demand and supply of goods in a free market to reach
equilibrium automatically is the invisible hand.
• He explained that an economy will comparatively work and function well if the government will leave
people alone to buy and sell freely among themselves.
• He suggested that if people were allowed to trade freely, self interested traders present in the
market would compete with each other, leading markets towards the positive output with the help of
an invisible hand.
• In a free market scenario where there are no regulations or restrictions imposed by the government, if
someone charges less, the customer will buy from him. Therefore, you have to lower your price or
offer something better than your competitor.
• Whenever enough people demand something, it will be supplied by the market and everyone will be
happy. The seller end up getting the price and the buyer will get better goods at the desired price.
CRITIQUES
• Critics argue that the idea that self-interested, profit-driven actors will converge on some social
optimum is clearly false, and that instead it naturally leads to negative externalities, economic and
social inequalities, greed, and exploitation.
• Moreover, competition driven by the invisible hand can ultimately result in monopolies and the
concentration of economic power, both of which are undesirable for society.
• Other critiques hone in on the fact that the concept relies on the assumption that producers can
easily switch from producing one type of good to any other, depending on its relative profitability at a
given moment.
Counterargument:
• This does not account for the sometimes enormous costs of switching and the idea that people may
engage in a business that they enjoy doing, or which has been passed down in a family, regardless of
profitability.
04
DIVISION OF LABOUR
DIVISION OF LABOUR
Adam Smith identified the division of labour and
specialization as the two key means to achieving a larger
return on production.
• Specialization: It means focusing on one task rather than
multiple tasks, which allows workers to perfect that one
task.
• Increased Productivity:
 According to Smith, the division of labour increases
productivity by allowing workers to become more skilled
and adept at their specific tasks over time.
 By repeating the same task, workers can develop
specialized knowledge, techniques, and tools that
enhance their productivity.
DIVISION OF LABOUR
• Time Savings:
 The division of labour saves time by reducing the
need for workers to switch between different
tasks.
 Workers can focus on their specialized tasks,
leading to smoother workflow and minimizing time
wasted on transitioning or retooling.
• Economies of Scale:
 The division of labour enables economies of scale,
as firms can produce goods in larger quantities,
benefiting from bulk purchasing, standardized
processes, and specialized machinery.
 This results in cost savings and lower prices for
consumers.
DIVISION OF LABOUR
Smith gave the famous example of pins. He asserted that ten workers could produce 48,000 pins per
day if each of eighteen specialized tasks was assigned to particular workers. The average productivity
is 4,800 pins per worker per day. But absent the division of labour, a worker would be lucky to produce
even one pin per day…
05
GDP
GROSS DOMESTIC PRODUCT
• The ideas in The Wealth of Nations provided the genesis
for the concept of gross domestic product (GDP) and
transformed the importing and exporting business.
• Before the publication of The Wealth of Nations, countries
declared their wealth based on the value of their gold and
silver deposits.
• However, Smith was highly critical of mercantilism; he
argued that countries should be evaluated based on their
levels of production and commerce. This concept was the
basis for creating the GDP metric for measuring a nation's
prosperity.
GROSS DOMESTIC PRODUCT
• When The Wealth of Nations was published, many countries were hesitant to trade with other
countries. Smith argued that a free exchange should be created because both countries are better
off from the exchange.
• As a result of this shift in attitudes toward trading, there was an increase in imports and exports.
Smith also argued for legislation that would make trading as easy as possible.
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REFERENCES
•
Smith, A. (1776). An Inquiry into the Nature and Causes of the Wealth of Nations.
•
Sharma, R. (2023, October 1). Adam Smith: Who He Was, Early Life, Accomplishments and Legacy . Investopedia.
https://www.investopedia.com/updates/adam-smith-economics/
•
Team, I. (2023, September 29). Free Market Definition & Impact on the Economy. Investopedia.
https://www.investopedia.com/terms/f/freemarket.asp#:~:text=Key%20Takeaways,transactions%20or%20conditions%20on%20transa
ctions.
•
Hayes, A. (2023, September 25). Adam Smith and “Wealth of Nations” Investopedia. https://www.investopedia.com/updates/adamsmith-wealth-of-nations/
•
Majaski, C. (2023, March 21). What Is the Invisible Hand in Economics? Investopedia.
https://www.investopedia.com/terms/i/invisiblehand.asp
•
What is Invisible Hand? Definition of Invisible Hand, Invisible Hand Meaning - The Economic Times. (n.d.). The Economic Times.
•
Team, I. (2021, May 3). How Does Specialization Help Companies Achieve Economies of Scale? Investopedia.
https://www.investopedia.com/ask/answers/051115/how-does-specialization-help-companies-achieve-economies-scale.asp
•
Division of Labor and Specialization - Econlib. (2021, August 7). Econlib.
https://economictimes.indiatimes.com/definition/invisible-hand
https://www.econlib.org/library/topics/highschool/divisionoflaborspecialization.html