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FREE TRADE (ADVANTAGES (6) Trade to promote growth (a) Increases demand…
FREE TRADE
DEFINITION
Free trade refers to the exchange of goods and services between countries without any artificial restrictions.
ADVANTAGES
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4) BoP improvement
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b) Financial account improves due to greater inflow of FDI and remittance of profits from off-shored companies.
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DISADVANTAGES
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6) Worsening BoP
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.