Free Trade and its Benefits - Essay Example

e study of this subject very seriously. According to Lipsey,International Trade is a transaction and trade of goods and services between two individuals living in different countries,two companies operating in different countries and even two governments indulging in some form of trading activity.International trade becomes Free Trade when there are no taxes, quotas and tariffs are levied to these transactions. International trade becomes controlled trade when taxes and quotas are present in the trade activity involving two parties from different countries.

There are certain advantages of Free Trade such as efficiency,improved standard of living and foreign earning.The disadvantages of Free Trade are plenty too.These include government revenue loss, deterioration for local industry and outflow of foreign reserves.It is widely believed that free trade leads to efficiency.This can be explained by a diagram,but we must keep in mind that opposite of free trade is one where the host government charges either tariffs or quotas on imported goods. In the above diagram, it can be seen that free trade is more meritorious to a situation where either no international trade is taking place or where the trade is not free.

At first there is no free trade. The market is work at a point where D=S or where demand is equated to supply. The equilibrium quantity of goods traded at this point is represented by “Y”. If the country decided to indulge in free trade then SW will become the supply curve and fewer goods will be traded in the market at point “Y1”. The reason why the quantity of goods traded in the market is reduced is because the imported goods are cheaper and local production of goods has reduced and the gap between Y-Y1 is filled by imported goods.

This is a point of controversy and economists who are against Free Trade argue that free trade will lead to closure and downsizing of local businesses resulting in massive unemployment in the country. Under these circumstances Free Trade looks like an evil and it looks a valid claim that imported goods should be stopped from penetrating the local markets. However, the supporters of Free Trade claim that it leads to better utilization of world’s scarce resources. They use the theories of absolute and comparative advantage to justify their claim and recommends that the country should divert from production of goods in which it does not have an absolute and comparative advantage to the good where these advantages can be exploited.

However, many countries choose a different route and exploit the benefits of allocative efficiency. They charge some sort of taxes to imported goods or give subsidies to local industries to make sure that local production remains high and local industries are able to compete with the imported goods. This leads to partial improvement in local industries situation, but at the expense of efficiency. Hence, one can see that any trade that is taxed or restricted cannot yield same amount of efficiency as uncontrolled trade.

Free Trade also renders certain other advantages too. It leads to an increase in choices that people can make. This is a necessary condition for improvement in living standard of people. Hence, Free Trade allows people to live a better life. Free Trade