Question

Ben Bernanke, former chairman of the Federal Reserve Board, cited a study that examined the effect of international trade on income in the U.S since World War II: removing all remaining barriers to trade would raise incomes anywhere from $4,000 to $12,000 per household. Discuss why our household incomes rise with free trade.

Answer 1

He said that by introducing the free trade, the US domestic firms will have an access to new markets. This will promote specialization, permit economies of scale and at the same time incentivize the firms to innovate. The US firms seek to increase the output and the profits will definitely benefit with the new international opportunities. US firms being the excel in the manufacturing sectors with the free trade or no barriers to trade would bring the new demanders of the products such as aircraft, plastics, chemicals and the construction equipment.

Another factor is that the export oriented or the technologically sophisticated firms are known to provide the better jobs. These exporting companies are said to pay higher wages than the domestic firms, causing a rise in the income of the employees.

Not just exports, imports are also important. The cheaper imports, on one hand, will affect the domestic producers but would incentivize them to innovate and bring up with the new products or ideas plus the cheaper prices will allow the tight budget consumers to enjoy these goods and services. The US import intensive retail chains anyway exist or cater to the low and moderate-income consumers.