Question

Moving from autarky to free trade generates gains for a country. What are the sources of these gains and explain how each results in a gain for the country.

Answer 1

Moving from autarky to free trade generates gains for a country. Inernational trade results in gains from trade.

Firstly, consumers get more goods at lower prices. This increases consumer surplus and results in increased social welfare. Social welfare may also be increased by lowering trade barriers like tariffs and quotas under international trade.

Secondly, nation as a whole benefits from division of labor and specialization. It can now produce those goods for which it has less opportunity cost. It can thus save its precious resources (with higher opportunity cost). With the savings it can buy more valued goods at lower price from those countries where the opportunity cost of producing those goods is lower.

Thirdly, the exporting country can enjoy economies of scale. When goods are produced in large scale, it results in economies of scale as average cost of each unit decreases.

Fourtly, large scale operations will lead to more employmet opportunities in the country, So, the unemployment rate falls, leading to a higher aggregate demand. Higher employment rate also leads to higher saving rate and consequently, higher investment rate and thereby, higher capital formation. Thus the economic growth will be higher.