Contents
1. Explain what is meant by the term ‘free trade’?................................................................. 2
2. Identify three advantages from trading internationally.......................................................4
3. Explain the theory of absolute and comparative advantage................................................5
4. Explain the terms ‘protectionism’ and ‘barriers to trade’. Provide two examples of
protectionism..............................................................................................................................6
5. Using real life examples explain why governments might wish to raise barriers to
international trade.......................................................................................................................8
6. Describe the role of the World Trade Organization (WTO) in the development of free
trade..........................................................................................................................................10
7. Explain the role of one of the following trade blocs:....................................................... 11
References................................................................................................................................ 12
Presentation.............................................................................................................................. 14
1. Explain what is meant by the term ‘free trade’?
, Free trade is a mostly theoretical policy in which governments place no tariffs, taxes, or
duties on imports and no export limits. In this context, free trade is the exact opposite of
protectionism, which is a protective trade strategy aimed at eliminating international
competition.
“Under a system of perfectly free commerce, each country naturally devotes its capital and
labor to such employments as are most beneficial to each. This pursuit of individual
advantage is admirably connected with the universal good of the whole.” (Ricardo, 1817)
In general, free trade allows consumers to benefit from lower costs, increased exports,
economies of scale, and a wider range of products.
2. Identify three advantages from trading internationally.
2
, Advantages of specialization and division of labor: - The division of labor and the
resulting specialization is a significant benefit. Different forms of active agents are present
in different areas. Each nation or area benefits from specializing in the production of goods
for which their factor equipment is best suited. Find the United Kingdom, which is rich in
iron ore and coal. Countries in the Middle East oil resources Tin and rubber are produced in
the Southeast Asian countries, while tea is produced in India and Sri Lanka.
As a result, countries with a distinct advantage in one commodity will specialize in its
manufacture and swap it for a product from another country that is better suited. Importing
is less costly than manufacturing.
Low–cost production: - A business may benefit from low-cost production outside of its
domestic operations by locating a country where labor is both inexpensive and plentiful.
Countries such as China, India, the Philippines, and Mexico, for example, have such low-
cost manufacturing opportunities. Multinational corporations manufacture greater volumes
as a result of their broader and larger markets, enabling them to enjoy the advantages of
large-scale economies such as lower manufacturing rates, access to expertise, and
efficiency, among other things.
National well-being: - International trade is practically a matter of life and death for many
countries. For example, without imports from other nations, the UK and Japan will be
unable to feed, clothe, and house their current populations. These countries' existence is
dependent on the export of manufactured products. When opposed to importing, the costs
of self-sufficiency would be exceedingly high. Without foreign trade, a morning cup of
coffee will become a luxury for Americans.
3. Explain the theory of absolute and comparative advantage.
3
1. Explain what is meant by the term ‘free trade’?................................................................. 2
2. Identify three advantages from trading internationally.......................................................4
3. Explain the theory of absolute and comparative advantage................................................5
4. Explain the terms ‘protectionism’ and ‘barriers to trade’. Provide two examples of
protectionism..............................................................................................................................6
5. Using real life examples explain why governments might wish to raise barriers to
international trade.......................................................................................................................8
6. Describe the role of the World Trade Organization (WTO) in the development of free
trade..........................................................................................................................................10
7. Explain the role of one of the following trade blocs:....................................................... 11
References................................................................................................................................ 12
Presentation.............................................................................................................................. 14
1. Explain what is meant by the term ‘free trade’?
, Free trade is a mostly theoretical policy in which governments place no tariffs, taxes, or
duties on imports and no export limits. In this context, free trade is the exact opposite of
protectionism, which is a protective trade strategy aimed at eliminating international
competition.
“Under a system of perfectly free commerce, each country naturally devotes its capital and
labor to such employments as are most beneficial to each. This pursuit of individual
advantage is admirably connected with the universal good of the whole.” (Ricardo, 1817)
In general, free trade allows consumers to benefit from lower costs, increased exports,
economies of scale, and a wider range of products.
2. Identify three advantages from trading internationally.
2
, Advantages of specialization and division of labor: - The division of labor and the
resulting specialization is a significant benefit. Different forms of active agents are present
in different areas. Each nation or area benefits from specializing in the production of goods
for which their factor equipment is best suited. Find the United Kingdom, which is rich in
iron ore and coal. Countries in the Middle East oil resources Tin and rubber are produced in
the Southeast Asian countries, while tea is produced in India and Sri Lanka.
As a result, countries with a distinct advantage in one commodity will specialize in its
manufacture and swap it for a product from another country that is better suited. Importing
is less costly than manufacturing.
Low–cost production: - A business may benefit from low-cost production outside of its
domestic operations by locating a country where labor is both inexpensive and plentiful.
Countries such as China, India, the Philippines, and Mexico, for example, have such low-
cost manufacturing opportunities. Multinational corporations manufacture greater volumes
as a result of their broader and larger markets, enabling them to enjoy the advantages of
large-scale economies such as lower manufacturing rates, access to expertise, and
efficiency, among other things.
National well-being: - International trade is practically a matter of life and death for many
countries. For example, without imports from other nations, the UK and Japan will be
unable to feed, clothe, and house their current populations. These countries' existence is
dependent on the export of manufactured products. When opposed to importing, the costs
of self-sufficiency would be exceedingly high. Without foreign trade, a morning cup of
coffee will become a luxury for Americans.
3. Explain the theory of absolute and comparative advantage.
3
