The Benefits of Trade

There are a number of benefits the citizens and firms of a country may enjoy as a result of being able to trade freely with the citizens and firms of another country.

  • The benefits of specialisation
  • The benefits of competition
  • The benefit of choice

By specialising in the production of goods and services the firms of a country will produce with a higher level of productive efficiency. The surpluses produced can then be traded with the surpluses of other countries. By specialising in the production of goods and services where there is an absolute or comparative advantage there is an overall gain in welfare. Increased global competition will encourage allocative and productive efficiency.

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The concepts of consumer and producer surplus can be used to assess the benefits of free trade. The different between the amount that consumers would be prepared to pay for a good or service rather than go without, and the price that they actually pay is called consumer surplus. It is used as a measure of satisfaction or welfare of consumers. The difference between the price that producers would be prepared to sell their produce at and the price that they actually sell it at is the producer surplus. These two together are a measure of the welfare of the ...

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