International trade increases the size of a firm’s market, resulting in lower average costs and increased productivity, ultimately leading to increased production. Free trade improves the efficiency of resource allocation. Increased competition promotes innovative production methods, the use of new technology, marketing and distribution methods.
Employment will increase in exporting industries and workers will be displaced as import competing industries fold (close down) in the competitive environment. With free trade many jobs have been created especially in manufacturing and service industries, which can absorb the unemployment created through restructuring as firms close down or downsize their workforce. The countries involved in free trade experience rising living standards, increased real incomes and higher rates of economic growth.
- When countries move to free trade and labor is immobile, in the export industry the real wage with respect to the exported good remains constant, but the real wage with respect to the import good rises in both countries.
- When countries move to free trade and labor is immobile, in general, workers in the export industry benefit, while workers in the import-competing industry lose.
- Improvements in production efficiency mean that countries can produce more goods and services with the same amount of resources. In other words, productivity increases for the given resource endowments available for use in production.
- reflected empirically in an increase in the country’s gross domestic product (GDP). This means that free trade would cause an increase in the level of the country’s national output and income.