Free trade

Issue with free trade

Over-reliance, vulnerability to shocks, structural unemployment, environment concern

Benefit of free trade

Allow for use of comparative advantage (efficient allocation of resources, increase output, export led growth)

Consumer benefit from low price high choice

Increase attractiveness to FDI

Facts that affect patterns of trade (what we trade and whom we trade with)

-protectionism and trading blocs

-exchange rate

-relative inflation

-comparative advantage

-primary product dependency

-geographical proximity (closer lower transport cost, gravity theory)

Absolute advantage definition

refers to a country's ability to produce more of a good or service with the same amount of resources as another country.

Definition of comparative advantage

occurs when a country can produce a good at a lower relative opportunity cost compared to another country. This theory suggests that even if a country does not have an absolute advantage, it can still benefit from trade by specializing in goods where it has a comparative advantage.