International Trade
Free Trade:
Free Trade: Agreement between countries to trade with each other without
erecting barriers to trade.
Advantages of Free Trade:
1) Increased Efficiency and Increase in Allocation of World
Resources (Comparative Advantage)
When there is free trade - incentive for nations to specialize - where they
have a cost advantage.
Can supply to world market at lowest cost
Dont supply resources that are not efficient to make - instead import those
resources.
This is Comparative Advantage
2) Access to Goods that wouldn't be produced domestically
More countries have access to goods and services that they don't produce.
For example, the UK can import bananas and satisfy demand for bananas
in the UK.
Businesses can access materials that would have been closed without free
trade.
3) Lower prices - Competition, EOS, Technological Transfers.
Consumers benefit from lower prices.
There is a huge amount of competition - improved efficiency - lower costs -
lower prices.
EOS benefits can be huge - as businesses supply larger market size - as
the amount produced is very large - large output - lower AC - lower prices.
Nations and businesses can access goods and services and can replicate
new technologies leading to better technological transfers - leading to
improvements in technology globally - greater efficiency - lower costs -
lower prices for consumers.
4) Greater Consumer Choice
, Consumers have greater access to all markets - greater choice of products
- customers are more satisfied.
5) Economic Growth and Current Account Position
If countries do specialize in areas where they have a comparative
advantage - they can supply domestic and world markets - gains from
exports rises - AD rises - leading to economic growth.
Higher AD = Better current account position due to increase in net exports.
Diagram Of Benefits of Free Trade:
Brazilian Market for coffee
Positive diagram Analysis:
Brazil opens up to free trade - world supply comes into the market.
World supply is set below market equilibrium and is horizontal.
Free Trade:
Free Trade: Agreement between countries to trade with each other without
erecting barriers to trade.
Advantages of Free Trade:
1) Increased Efficiency and Increase in Allocation of World
Resources (Comparative Advantage)
When there is free trade - incentive for nations to specialize - where they
have a cost advantage.
Can supply to world market at lowest cost
Dont supply resources that are not efficient to make - instead import those
resources.
This is Comparative Advantage
2) Access to Goods that wouldn't be produced domestically
More countries have access to goods and services that they don't produce.
For example, the UK can import bananas and satisfy demand for bananas
in the UK.
Businesses can access materials that would have been closed without free
trade.
3) Lower prices - Competition, EOS, Technological Transfers.
Consumers benefit from lower prices.
There is a huge amount of competition - improved efficiency - lower costs -
lower prices.
EOS benefits can be huge - as businesses supply larger market size - as
the amount produced is very large - large output - lower AC - lower prices.
Nations and businesses can access goods and services and can replicate
new technologies leading to better technological transfers - leading to
improvements in technology globally - greater efficiency - lower costs -
lower prices for consumers.
4) Greater Consumer Choice
, Consumers have greater access to all markets - greater choice of products
- customers are more satisfied.
5) Economic Growth and Current Account Position
If countries do specialize in areas where they have a comparative
advantage - they can supply domestic and world markets - gains from
exports rises - AD rises - leading to economic growth.
Higher AD = Better current account position due to increase in net exports.
Diagram Of Benefits of Free Trade:
Brazilian Market for coffee
Positive diagram Analysis:
Brazil opens up to free trade - world supply comes into the market.
World supply is set below market equilibrium and is horizontal.
