Question

If you use a souce, please list it here.

What is free trade, and how does the theory of comparative advantage support free trade?

What are exchange rates and how are they determined?

Answer 1

1.Free trade is international trade without barriers against imports and exports. Free trade is the opposite of protectionism and importer and exporter voluntarily trade without tariffs, quotas or any barriers to trade.

The principle of Comparative Advantage states that a country will produce the goods which it can produce most efficiently. The country will have lower opportunity cost in the production of those goods. The country will export those goods which have a lower opportunity cost, i.e. in which it has comparative advantage) and import those goods which have a higher opportunity cost. Free trade enables countries to exports goods in which they have comparative advantage.