Answer to Question #234101 in Economics for Ayanda

Question

Argure how free trade rather than protectionism can favour counties

Answer 1

Through free trade based on the principle of comparative costs, the world economy can achieve more efficient allocation of resources and higher levels of material well-being. The resource structure and level of technological knowledge of each country is different. Consequently, each country can produce certain goods at different real costs. Each country must: 1) produce those goods whose production costs are relatively lower than those in other countries, and 2) exchange the goods in which it specializes for those products whose production costs in this country are higher than in other countries. If each country does this, the world economy can take full advantage of geographic and human specialization. In other words, each freely trading country can get more real income from the use of the amount of resources at its disposal. If countries cannot trade freely, they must shift resources from efficient (low-cost) use to inefficient use to meet their diverse needs.

A side benefit of free trade is that it stimulates competition and limits monopoly. Increased competition from foreign firms is forcing local firms to move to production technologies with the lowest costs. It also forces them to innovate and keep abreast of technological progress by improving product quality and adopting new production methods, and thus contribute to economic growth. Free trade provides consumers with a wider range of products to choose from. The reasons for choosing free trade are essentially the same ones for stimulating competition. Therefore, it is not surprising that the overwhelming majority of economists view free trade as an economically sound phenomenon.