Imagine a world with two neighboring towns, Fairfield and Ottumwa. Fairfield makes very high quality chairs, Ottumwa makes very good cheese. What would happen if the chair maker in Ottumwa asked everyone to "buy local," and get their chairs from him instead of from Fairfield?
His arguments would be familiar:
1. For every $100 you spend in my chair shop, $68 is returned to the community through taxes, payroll, and my own spending.
2. If you don't buy local chairs, we won't have a local chair shop anymore.
3. If everyone purchased local chairs we would keep all of our money in the community, which will make us all better off.
All of this is nonsense, and it's not difficult to see why if we reduce the situation further. Imagine everyone took his advice and stopped trading cheese for chairs. Fairfield's citizens would no longer have high quality cheese, and Ottumwa would no longer have high quality chairs. Both towns are worse off.
Imagine further that Ottumwa continues to successfully encourage local shopping and succeeds in supporting all of its local businesses. They have a guy who makes dull knives, they have another guy making okay vegetables, and myriad other citizens make everything the town needs. Now let's compare them to Fairfield, which trades chairs for everything it needs. It trades with Iowa city to get sharp knives, and with Mt. Pleasant to get high quality meat. It gets everything it needs from other cities who also have an exemplary skill, be it knife making or chicken farming.
Ottumwa, whose citizens all buy locally produced products, enjoys only one high quality product -- cheese. Fairfield, on the other hand, who's citizens only produce chairs, enjoy high quality everything. When we begin talking about words most don't understand, it is easy to imagine that keeping money close to home is a good idea. If we remove the confusion of money from the situation and imagine we are simply trading goods with other towns, it is easy to see that when towns trade, everyone enjoys higher quality products at no cost to themselves. We have great chairs, you have great cheese, let's share!
If trade is removed, each citizen in each town is worse off. The only benefactor of the buy local ideas are the crappy cheese maker in Fairfield or the uncomfy-chair maker in Ottumwa; they become rich when locals feel guilty about trading with their neighbors.
There is no benefit to "keeping money in the community." The statement is absurd, akin to saying "keep chairs in the community," which would be pointless. Trading chairs to other towns doesn't hurt Fairfield residents. It isn't as if there are a limited amount of chairs, and we must pass them around amongst ourselves in order to have a healthy economy. To the contrary, the more chairs that leave the community via trade, the better off all of us will be.
Additionally, the term "local" is subjective in nature. How far does one need to go before a product is not "local" anymore? Is the guy on the edge of town still local? What if he lives halfway to Ottumwa? Is your next door neighbor more "local" than the guy one block away?
Let's go further with our simplistic example and imagine that our neighboring town, Batavia, has no skills and no products. Its workers are uneducated and there are no industries there. Everyone is living in huts and foraging for food. Fairfield's chairs are the best in the area and that people in Chicago are traveling to purchase chairs from us. We need to produce more. What is the answer? We set up a chair factory in Batavia. Unfortunately everyone there wants to work in the chair factory, but none have skills, all need to be trained from scratch (high quality chair making is complicated, delicate work) and all of them virtually beg for a job instead of their continued foraging and dumpster diving.
The factory in Batavia helps the citizens there, and it helps the people in Chicago, who want better chairs, and it helps Fairfield, which is able to enjoy more and more high quality products when it trades away its chairs. Eventually, the low pay rates in Batavia will rise as workers there become skilled, save money, and move to thinking about making something of value instead of wasting their lives looking for food and shelter.
Buying products made in Batavia supports the Batavians, the Fairfield residents, and all residents of the entire surrounding area who wish to own Fairfield's chairs. Without the Batavian factory, Batavians would forage for food, Fairfield would have less money, and the people of the surrounding area would have lower quality chairs.
Obviously this is a simplified example. Batavians being forced to work in horrible conditions, the pollution involved in transport, and other problems are not discussed in order to present an understanding of trade in its pure form.