Economics

What are the advantages and disadvantages of adopting a free trade strategy by a country?

This assignment will look the free trade strategy by a country and how it helps different countries it will also look at how it helps countries develop, the barriers/restrictions which stop trade and the role of the world trade organisation on trading. Without international trade we would all be much poorer there would be some items like pineapples, coffee, cotton clothes, foreign holidays and uranium that we would simply have to go without. Then there would be other items like wine and spacecraft we could produce only very inefficiently. International trade has potential to benefit all participating countries. Totally free trade however may bring problems to countries or to groups of people within those countries. Many people argue strongly for restrictions on trade. Textile workers see their jobs threatened by cheap imported cloth. Car manufacturers worry about falling sales as customers switch to Japanese models or other East Asian ones.  

Absolute advantage is where a country is able to produce more cheaply in absolute than another country e.g. if France can produce wine with less resources than the UK, and the UK can produce gin with less resources than France, then France has an absolute advantage in wine an the UK in gin. Production of both wine and gin will be maximised by each country specialising and then trading with the other country. Both will gain.

Comparative advantage an ability of a country to produce a product at a lower opportunity cost than some other country. In a two-good, two country model, one country may have an absolute advantage in both goods, but still have a comparative advantage in one that is to say that for which its absolute advantage was greatest or its absolute disadvantage least.

The gains from trade based on comparative advantage. Before trade unless markets are very imperfect, the prices of the two goods are likely to reflect their opportunity costs. For example, since the less developed country can produce 2 kilos of wheat for 1 metre of cloth, the price of 2 kilos of wheat will roughly equal 1 metre of cloth.

Assume then, that the pre-trade exchange ratios of wheat for cloth are as follows:

Less developed country: 2 wheat for 1 cloth

Developed country: 1 wheat for 2 cloth (i.e. 4 for 8)  

Both countries will now gain from trade, provided the exchange ratio is somewhere between 2:1 and 1:2 assume that it is 1:1. In other words 1 wheat trades internationally for 1 cloth. The less developed country gains by exporting wheat and importing cloth. At an exchange ratio 1:1, it now only has to give up 1 kilo of wheat to obtain a metre of cloth, whereas before trade it had to give up 2 kilos of wheat.

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The developed country gains by exporting cloth and importing wheat. Again at an exchange ratio of 1:1, it now only has to give up 1 metre of cloth to obtain 1 kilo of wheat, whereas before it had to give up 2 metres of cloth. Therefore both countries have gained from trade. There are many gains from trade such as decreasing costs this is where even if there are no initial comparative cost differences between two countries, it will still benefit both to specialise in industries where economies of scale can be gained, and then to trade. Once the economies ...

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