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Free Trade

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. However, the supporters say that this leads to more efficient use of global resources as efficiency as more products are being produced where they can be produced cheaply. Although it might be beneficial on the global basis, it should be discourage in the developing economies which are seeking to maximize employment rate and implementing policies for the growth of local industries. Faced with this problem many countries often charge a tariff on imports which increase it's price and hence reduces the impact of imports on local industry and market. This increase reduces the local supply from Y to Y2 which is creates a lesser impact on domestic supply but still it is large enough to affect domestic industry and hence receives criticism from people who suffer from unemployment etc. However, once a a high tariff is charged raising the price of imported goods above what is being incurred in local market, it does not affect the local industry, in theory. This is the right amount of tariff and completely against the free trade, but people who oppose free-trade are appeased by this as local industry is not harmed. Similarly, supporter of free-trade argues that this is against the economic teachings of productive and allocative efficiency as the benefits of low-cost are not being enjoyed by the people resulting in less demand and people who want to consume the products at lower prices are not being catered i-e allocative inefficiency.
Before coming at the conclusion whether free-trade should be allowed or not, let's look at absolute and comparative advantages.
Absolute advantage occurs when one country can produce one commodity better than other i-e the production cost in one country is lower than other or requires far less resources and hence efficient.
Following assumptions are necessary for the use of absolute advantage theory:

There are only two ...Show more

Summary

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.
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