Free trade :: where governments impose no artificial barriers to trade that restrict the free exchange of goods and services between countries
→ with the aim of shielding domestic producers from foreign competitors.
Example of barriers:
subsidies
quotas
tariffs
Comparative advantage
Comparative Advantage :: countries producing what they can naturally produce more efficiently (e.g. China producing motor vehicles with cheap labour)
i.e. goods & services with the lowest opportunity cost
Opportunity cost
Opportunity cost represents :: the alternative use of resources. Often referred to as the “real” cost, it represents the cost of satisfying one want over an alternative want.
This is also known as economic cost.
Advantages of Free trade
Allows countries to obtain goods and services they cannot produce themselves
or in sufficient quantities to satisfy domestic demand.
i.e. countries with a Comparative disadvantage for certain products
allows countries to specialise in the production of the goods and services in which they are most efficient.
encourages the efficient allocation of resources
“A greater tendency for specialisation leads to economies of scale, which will lower average costs of production while increasing efficiency and productivity.”
International competitiveness will improve
encourages innovation
lower prices → leads to higher living standards
Disadvantages of Free trade
A potential increase in unemployment; domestic businesses may find it hard to compete with imports.
Difficult for less advanced economies to establish new industries
production surpluses from some countries may be dumped on the domestic market