Question

Carefully explain how/why a country is generally better off under free trade.

Answer 1

There are two main reason

1. Comparative advantage: This is due to tyhe fact that if a country specialise on the good in which it incurrs lesser economic cost and import goods which have higher economic cost leads to gains for both the importing country and the exporting country as more of both the good is produced.

2. Increase in Total surplus: when in free trade, a county may choose to import goods which have a higher cost in thye domestic market than in the international market. This makes the country import goods at a lower price increasing the consumer surplus. Yes, the producers surplus does decreae, but the magnitude of decrease is lesser than the increae in the consumer surplus. Thus there is a positive net increase in the total surplus.

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