Originally posted by: 91TTZ
Let's look at it in the small scale. We're the only inhabitants on a small island and we both live good comfortable lives. You're a farmer that makes food and clothes, and I'm a factory worker that makes appliances and cars. We buy each other's things and keep each other in business. The money stays between us in our local economy. We live a good life this way.
Then I hear that someone on another island is selling food for a price that you can't compete with. I, not knowing the long term implications, decide to buy my food from them instead of you. I save money this way and in the short term I made out good. But in the next couple of years, I notice that you're not buying as many appliances or cars from me. I don't know why. You tell me that since I stopped buying food from you, you don't have the money to buy as many of my appliances, and you had to buy some of their appliances instead.
So I'm making less money now, too. With less money to spend, in my naivety I decide that I should buy my clothes from the people on the other island too. I save some money by doing that and now I'm temporarily making out as well as I was before. But you go out of business. I feel sorry for you but I can't see that it's my fault. But now all orders for my products have stopped. You're not buying anything from me because you have no money. I can no longer stay in business, so I go broke too.
Then the two unemployed island residents each started a new business, which was in demand. The residents of the other island now see this new good and service, and begins to buy it. Island 1 now has a strong economy and provides something the other island did not have. Island 2 now has something new that wasn't available to them before, which then benefits them. Both islands have become semi-dependent on the economies of the other, and this system is now not only stable, but helps keep each island in check.
Although they each suffered a brief problem, then end up making out better in the end as well as the entire society of islands that benefit from newer industries.