Benefits of Free Trade Flashcards
(13 cards)
What is free trade?
Free trade is international trade without barriers such as tariffs, quotas, or embargoes. It allows goods and services to flow freely between countries.
Benefit 1 – Efficiency and Resource Allocation
Free trade encourages countries to specialise in goods where they have a comparative advantage, improving global resource allocation and overall productive efficiency.
Benefit 2 – Access to Goods Not Produced Domestically
Free trade gives countries access to goods they cannot produce efficiently or at all, e.g. the UK importing bananas due to unsuitable climate.
Benefit 3 – Lower Prices for Consumers
Increased competition from foreign producers leads to lower prices, lower average costs, and better consumer choice.
Benefit 4 – Greater Competition
Domestic firms must improve efficiency and innovation to stay competitive, driving productivity gains and better quality.
Benefit 5 – Economies of Scale
Access to larger international markets allows firms to scale up production, reduce average costs, and achieve significant economies of scale.
Benefit 6 – Technology Transfer
Free trade encourages the spread of technology and ideas, as businesses observe and adopt innovations from around the world more quickly.
Benefit 7 – Foreign Investment and Growth
Open markets attract foreign direct investment (FDI), leading to job creation, technology inflows, and long-term economic growth.
Benefit 8 – Dynamic Efficiency
Exposure to global markets pushes firms to constantly improve, leading to faster innovation, better use of resources, and long-term productivity growth.
How does free trade increase consumer choice?
Free trade opens access to a larger variety of goods and services from different countries, giving consumers greater choice and better quality options.
How does free trade support economic growth?
By specialising in exports, countries can scale up production, boost GDP, and earn foreign exchange. Export-led growth increases aggregate demand (via X–M) and attracts investment.
What is an example of export-led growth?
Brazil and coffee — Brazil specialises in coffee and supplies the global market, reaping large export revenues and supporting jobs, growth, and infrastructure.
How does free trade affect the domestic market price and consumer surplus?
Free trade introduces a lower world price (Pw), which:
Increases quantity demanded
Reduces domestic producer revenue
Greatly increases consumer surplus (CS)
Consumers benefit from cheaper prices and larger quantities of goods available.
