Advantages and disadvantages of Trade

Question 1

How does free trade affect competition?

Answer 1

• increased competition for suppliers
• greater pressure on businesses to keep their costs and prices down
• increased competition can lead to a dilution of monopoly power; which reduces the potential for exploiting consumers
• this leads to an improvement in the allocative efficiency of scarce resources

Question 2

How does free trade affect in terms of comparative advantage?

Answer 2

• If other countries can supply certain goods and services more efficiently; it makes economic sense for them to do so
• this makes use of the principle of comparative advantage
• it also leads to an improvement in overall productive efficiency

Question 3

How does free trade improve dynamic efficiency?

Answer 3

• trade tends to speed up the pace of technological progress and the innovation across different industries
• trade provides more choice for consumers
• dynamic efficiency gains become apparent over time; for example improvements in the quality and performance of products at a given price.

Question 4

How does trade affect economies of scale?

Answer 4

• representing gains in productive efficiency and leading to higher profits and lower prices for consumers.

Question 5

How does Trade being seen as a stimulant to short term aggregate demand and long run economic growth?

Answer 5

• Exports are an injection of aggregate demand
• a boost to exports will have multiplier effects on the level of equilibrium national income
• there may be extra supply side improvements from increased capital investment between companies and countries engaged in international trade.