FREE TRADE
DEFINITION
ADVANTAGES
DISADVANTAGES
Free trade refers to the exchange of goods and services between countries without any artificial restrictions.
1) Innovation and transfer of technology and FDI
2) Higher standard of living
3) Factor price equalization
4) BoP improvement
6) Trade to promote growth
5) Greater efficiency in production and lower world prices
7) Increases in competition and prevention of monopolies
a) Fierce competition among international firms stimulates efforts to lower costs and improve the quality of their products. This attracts FDI with greater profits and returns.
b) Free trade also allows firms from developed economies to offshore their factories to developing economies. This allows for a transfer of technology and improves economic growth.
a) Higher consumption level due to higher efficiency level from devoting factor endowments to goods in countries that have a comparative advantage. Hence, the country can consume beyond its production possibility in the PPC with free trade
b) Greater variety of goods and services due to more imports available.
a) International trade brings the price of factor inputs closely together so that huge gaps between wages in different countries are less likely to occur.
a) Current account improves and net exports increase due to greater volume of trade.
b) Financial account improves due to greater inflow of FDI and remittance of profits from off-shored companies.
a) Firms are able to reap internal economies of scale to spread their costs over a larger output. This eventually lowers the price of final products.
a) Free trade increases competition and efficiency, keeping price comparatively low for consumers as the market become more contestable.
a) Increases demand for exports due to a larger market(global)
b) Lower price of exports due to more competition. Assuming exports are price-elastic in demand, a fall in price results in a more than proportionate rise in the quantity demanded.
c) Increase in net export, increase in AD and increase in national income by multiplier effect results, leading to actual economic growth.
1) Unfair competition and dumping of goods
2) Structural Unemployment
3) Environmental degradation
4) Widening income disparities
5) Over-reliance on foreign imports
6) Worsening BoP
a) Dumping refers to the selling of the same goods to a foreign country at a lower price than the one charged to domestic buyers. The price is often below the marginal cost of production.
b) The objective is to drive out rival producers in the importing country.
c) Often leads to protectionist measures and trade wars in retaliation.
a) Mismatch between a worker's skill and job requirements when there are changes in technology and location of jobs due to international competition. When developed countries relocate their plants to developing countries, locals become geographically and occupationally immobile.
a) Poor developing countries tend to have no stringent anti-pollution standards. Market failure results.
a) Rapid growth provides opportunities for incomes of skilled workers to increase at a rate faster than that of low-skilled workers.
b) Social and political tension may result.
a) Susceptible to externally-reduced cyclical unemployment during an economic crisis, as types of jobs are limited.
b) Susceptible to imported inflation if the country is heavily dependent on imported goods for consumption and production.
a) In developing countries, as high tech capital goods are more income elastic in demand, imports of these goods will increase with an increase in income. As demand for imports becomes higher than demand for exports, net exports fall and the balance of trade worsens.
b) However, with MNCs offshoring to developing countries,the demand for exports and inflow of FDI increases, improving both current and financial account.
c) In developed countries, persistent trade deficits may occur as outflow of investment to other countries in the form of offshoring occurs. Financial account worsens.
d) However, in the long run, profits remitted back can improve the current account.