Question

I am confused in my economics class. Why would allowing free trade be the most effective at boosting growth and living standards in a poor country over the long run? Please give a detailed explanation so I can really grasp the information.

Answer 1

Free trade means that countries can import and export without any tariff barriers to trade. As it enables lower prices for consumers due to which a person can buy more and more commodities in cheap prices and can increase his standard of living easily,it benefits from economies of scale and a greater choice of goods. Trade is the engine of growth.

There are so many benefits of free trace some are here -

1.The theory of comparative advantage.

This explains that by specialising in goods where can have a lower opportunity cost ,there can be an increase in economic welfare for all countries.

2.Increased exports-lower tariff on UK exports will enable a higher quantity of exports boosting UK jobs and economic growth.

3.Economies of scale -If countries can specialise in certain goods they can benefit from economies of scale  and lower average cost. As a result of which, consumers will feel a price relief in some commodities.

4.increased competition -with more trade ,domestic firms will face more competitions from abroad.Therefire,there will be more incentives to cut costs and increase efficiency. It may prevent domestic monopolies from changing too high prices as a result of which, again consumers will increase their demands for commodities with decreased prices and hence, can raise their living standards.

If you still have any queries, do let me know, I will answer as soon as possible.