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Free Trade refers to the open transactions between two countries without any form of interference from the government of these two nations in the form of tariff, quotas or other form of trade restrictions. Many countries have understood the importance of free-trade's necessity in terms of efficient consumption and production, economic growth and other economic benefits that are brought about by the trading between two or more countries.

Introduction


Suppose that at first no trade was occurring as a result of which the original demand and supply curve, D & S respectively are the country's demand and supply. At the point equilibrium occur at point Y at the interaction of two points. However, if a country indulges in free trade SW curve becomes its supply curve and new equilibrium occurs at Y1. The result why the equilibrium quantity of supply is lower than for the demand curve S is because some countries can produce these products at a lower price than others because of comparative and absolute advantages discussed below and as a result our country will stop the production of this good citing that other countries can produce it cheaply. This is a point of controversy among supporters of free trade and people who are against free trade. The people who oppose free trade argues that domestic production will reduce from Y to Y1 as result of free trade and hence this implies closing down of factories, downsizing and unemployment of local factors of production. They say that free trade is an evil that should be stopped from penetrating a local market for the reasons discussed above. ...
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