Question

Trade through free trade area is able to reduce barriers to easy exchange that trade can grow as a result of specialization and division of labor. With respect to this, explain the concept of free trade area. Also discuss, how free trade area is related with the theory of comparative advantage.

Answer 1

A free trade area means a region where a group of countries decide to have a free trade agreement. It means they will maintain little or no barriers to trade. These barriers are in the form of quotas or tariffs. Free trade areas facilitate international trade and associated gains from trade along with the international division of labor and specialisation. It helps the countries to export the goods which they specialise in and import the rest of the goods. This also benefits the customers as they have increased access to less expensive and high quality goods. Also the tariffs are eliminated which further helps in decreasing the prices of goods. The producers also get more potential customers in different countries. The theory of comparitive advantage suggest that total economic welfare of countries is improved when export the goods in which they specialize and have the highest expertise and lowest opportunity cost and import the rest of the goods for example during the industrial revolution Britain outsourcedits food growth and focused on manufacturing the goods for export, thus becoming the workshop of the world for decades.
Suppose if there are two countries india and china. If India can produce 6 kg of wheat and 3 kg of rice and china can produce 1 kg of wheat and 2 kg of rice then India can export wheat and import rice. But this is possible only when there is a free trade policy. This is how free trade area is related to theory of comparative advantage.