Under what circumstances will a move to free trade make everyone in an economy better off ?For what I know there's a link between my question and the comparative advantage (On the assumptions that...

Under what circumstances will a move to free trade make everyone in an economy better off ?

For what I know there's a link between my question and the comparative advantage (On the assumptions that there are no or low transaction costs, that there are no negative externalities to more production, and that there are some restrictions on the flow of capital) but I'm not really sure. I know there's other concept involved any ideas ?

Asked on by lsirois

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

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According to most economists, free trade will make everyone in an economy better off (at least in the long run) so long as the countries that are trading have comparative advantages in different things.  If one country has no comparative advantages relative to another country, those two countries will not trade.

The concept of comparative advantage is the most important concept here.  It tells us that some countries have higher opportunity costs than others for any given product.  Some countries have to give up more in order to produce a certain good than other countries do.  Whenever this is true, it is best for the country with the lower opportunity cost to produce a good and to trade it for goods for which it has a higher opportunity cost.  When this happens, total production and consumption for the world as a whole rises and everyone is better off.

We must note, however, that there will be short term harms done to people in each economy.  Let us imagine that the US has been making shirts, for example, and then stops doing so because it no longer has a comparative advantage.  If it no longer makes shirts, those people who worked making the shirts will be harmed as they will be unemployed until (or unless) they can find another job.

So long as there are low transaction and transport costs and so long as trade barriers are low or nonexistent, trade is better for all (in the long term) so long as countries have different comparative advantages.

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