The Theoretical Case for Free Trade

Question 1

What is Free Trade?

Answer 1

Free Trade is a trade policy in which two or more countries trade with each other and grant reduced/ no import or export barriers. Free Trade can be explained by Classical Theory.

Question 2

How can Classical Theory explain free trade?

Answer 2

Absolute and Relative Advantage are the cornerstones of Classical Theory. Absolute Advantage states that if a county is better a production of one item, it should focus entirely on that production and trade that item for another country’ production.

Comparative Advantage on the other hand states that the country should focus on production of goods it has a relative advantage in over other countries.

Question 3

How can Classical Theory explain inter-industry trade?

Answer 3

Classical Theory can explain that inter-industry trade (that being the trade between industries), but cannot explain intra-industry trade.