This exercise is from English, Economics & Management, a book which  is an adaptation by Prof Rajiva Wijesinha of the original volume by Gartney and Stroup that presented basic economic principles simply. The principles are essentially liberal, but their universality will be clear in the context of the development of social and economic theories all over the world in the last few decades. 

I am grateful to Michael Walker of the Canadian Fraser Institute for encouraging me to use this text for English Teaching. The book should be used in conjunction with A Handbook of English Grammar (Foundation Books, Cambridge University Press, India). The full text of English, Economics & Management, as well as other  English books and materials that can be downloaded to enhance your English knowledge, can be found on the website of the Liberal Party of Sri Lanka. 


Mutual gain is the foundation of trade. Parties agree to an exchange because they anticipate that it will improve their well-being. The motivation for market exchange is summed up in the phrase, “If you do something good for me, I will do something good for you.” Trade is productive; it permits each of the trading partners to get more of what they want.

There are three major reasons why trade is productive—why it increases the wealth of people. First, trade channels goods and services to those who value them most. A good or service does not have value just because it exists. Material things are not wealth until they are in the hands of someone who values them. The preferences, knowledge, and goals of people vary widely. Thus, a good that is virtually worthless to one may be a precious gem to another.

For example, a highly technical book on electronics that is of no value to an art collector may be worth thousands of rupees to an engineer. Similarly, a painting that is unappreciated by an engineer may be an object of great value to an art collector. Therefore, a voluntary exchange that moves the electronics book to the engineer and the painting to the art collector will increase the value of both goods. At the same time, the exchange will increase the wealth of both trading partners and the nation because it moves goods from people who value them less to people who value them more.

Second, exchange permits trading partners to gain from specializing in the production of those things they do best. Specialization allows us to expand total output. A group of individuals, regions, or nations will be able to produce a larger output when each specializes in the production of goods and services it can provide at a low cost, and uses their sales revenue to trade for desired goods it can provide only at a high cost. Economists refer to this principle as the law of comparative advantage.

In many ways, gains from trade and specialization are common sense. Examples abound. Trade permits a skilled carpenter to specialize in the production of frame housing while trading the earnings from housing sales to purchase food, clothing, automobiles, and thousands of other goods that the carpenter is not so skilled at producing. Similarly, trade allows Canadian farmers to specialize in the production of wheat and use the revenue from wheat sales to buy Brazilian coffee, a commodity that the Canadians could produce only at a high cost. Simultaneously, it is cheaper for Brazilians to use their resources to grow coffee and use the revenue from this to buy what they need.            

Modern production of a good like a pencil or an automobile often involves specialization, division of labour, large-scale production methods, and the cooperation of literally tens of thousands of people. Gains from these sources of production are dependent upon exchange.

Third, voluntary exchange permits us to realize gains derived from cooperative effort, division of labour, and the adoption of large-scale production methods. In the absence of exchange, productive activity would be limited to the individual household. Self-sufficiency and small-scale production would be the rule. Exchange permits us to have a much wider market for our output, and thus enables us to separate production processes into a series of specific operations in order to plan for large production runs. Such actions often lead to enormous increases in output per worker.

Adam Smith, the “father of economics,” stressed the importance of gains from the division of labour more than 200 years ago. Observing the operation of a pin manufacturer, Smith noted that the production of the pins was broken into “about eighteen distinct operations,” each performed by specific workers. When the workers each specialized in a productive function, they were able to produce 4,800 pins per worker each day. Without specialization and division of labour, Smith doubted an individual worker would have been able to produce even 20 pins per day.

Specialization permits individuals to take advantage of the diversity in their abilities and skills. It also enables employers to assign tasks to the workers who are more able to accomplish them. Even more importantly, the division of labour lets us adopt complex, large-scale production techniques unthinkable for an individual household. Without exchange, however, the gains from these would be lost.


 Grammar and Sentence Structure

  1. Rewrite the last paragraph in the past tense, and the one before the last paragraph in the present tense, leaving out the time marker in the first sentence.
  2. Identify to what the italicized pronouns in the fourth and last paragraphs refer.
  3. Identify the prepositions in the first three paragraphs and use them in sentences of your own.
  4. Identify the sentences in the last three paragraphs and say whether they are compound or complex. Are there any sentences, here or elsewhere in the passage, that use relative pronouns? Divide them into simple sentences.


  1. Work out from their context the meanings of the highlighted words, and use them in sentences of your own.
  2. Divide the words that are underlined into nouns and adjectives. Find words that mean the opposite of these (nouns for nouns and adjectives for adjectives), and use them in sentences of your own.
  3. Find words or phrases in this passage that are used to convey meanings similar to the following – Give, allows, do, move, differ, great, separate, emphasized, difference, looking at


  1. What are the three reasons given for trade being productive? Explain each reason in your own words.
  2. Identify the examples given for each of the above reasons and provide other examples for each of these. Can you think of examples that suggest a different viewpoint to that of the writer?
  3. Give examples of specialization and division of labour from your own experience at home or where you have studied.