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Economics explained


International trade

The benefits of free trade

The benefits of free trade

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Access to resources

International trade enables firms and consumers to gain access to goods and services that they cannot produce themselves.

Greater choice

Consumers may be able to buy a greater variety of products as they may have a wider choice of products, Firms may also have a wider source of raw materials and capital goods.

Efficient allocation of resources

Free trade allows an efficient allocation of resources with countries being able to concentrate on producing those products that they have a comparative advantage in. Allowing countries to specialise in those products where their production is most efficient should increase world output and employment and so should raise living standards.

Factor endowments

The availability and the quality of resources differ between countries. Free trade permits countries that have, for instance, fertile land and the appropriate climate to concentrate on growing oranges while other countries that have the financial institutions and well-educated workers to concentrate on banking.

Improved international relations

The absence of trade barriers encourages international trade and cooperation between countries. By contrast, if a country uses international trade barriers, other nations are likely to retaliate by doing the same.

Lower prices

Free trade reduces the costs of trading, whereas protectionism increases the costs of trading.

For example, it is cheaper for Germans to purchase foreign -produced smartphones made in China and Taiwan because of the high labour costs in Germany. By contrast, the imposition of trade barriers would mean that both domestic firms and consumers have to pay more for imported goods and services.

The competition that may arise from free trade can put pressure on firms to keep their prices and costs down and raise the quality of their products. As a result, consumers may enjoy lower prices and better products than would have been the case in the absence of free trade. Firms may also be able to buy raw materials and capital goods at lower prices.

Economies of scale

Having a global market to sell to may enable firms to produce higher output and so take greater advantage of economies of scale.

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