Question

Define free trade.

9. Why do many economists believe that unrestricted free trade between nations will raise the economic welfare?

10. Explain Q.9 above in terms of absolute and comparative advantage,

Answer 1

Q9 AND 10) Free trade is a policy in which all the countries lift any restrictions over bilateral and multilateral trade such as tariffs, import quotas, taxes or duties etc. free trade mutually advantageous to all the countries involved as it expands the possibility frontiers for all the countries. It is because each country has a certain comparative advantage in the production of some goods over the other country- a good it can produce at a lower opportunity cost. This is true even if one country has an absolute advantage in all the products i.e. it generates more output of all products with the same resources as another country. If the countries produce according to their comparative advantage and then indulge in free trade, all countries will have a larger set of output than would have been the case under no trade. Thus, free trade is generally accepted as a means of welfare maximization by several economists and policymakers alike.