Do you know ?
“Whenever we went for protective measures, we found ourselves into deep trouble. On the contrary, whenever we advocated the cause of the Free Trade, we witnessed recovery and boom.Then, isn’t it highlight the importance of free trade system ?”
“Meaning of free trade system”
It is a broad trading network of many trading nations for restriction free flow of goods and services across world.
•Motive is clear, to increase market participants, create competitive market, and generate surplus for consumers and producers.
“Our past experiences suggest that nothing would be achieved by barriers but depression.So, free trade is the only option”
How does comparative advantage result out of free trade system ?
Free trade system offers choices for producers and nations to make production of any goods or services in which they have lesser opportunity cost.
In other words, free trade system gives opportunity of production of commodity in which producers have comparative advantage, in terms of production cost.
Meaning of comparative advantage
•It is an economic principle which empower firm to produce a commodity with lesser “opportunity cost”.
•Simply, nations with cheaper factors of production have greater comparative advantage over others.
•Comparative advantage principle is widely used in the decision making of production of goods and services.
Magic of comparative advantage in free trade system
•Whenever there are differences in factors of production (FOP) of prices of any commodity or service among two or more trading nations, it is used to said that nations with lesser (FOP) have greater advantage compare to peers.
•As such, the prices of factors of production aren’t same across the global economy owing to inequality in the pace of development.
•Surplus labour force in the developing as well as under developed countries results in lower wages whereas opposite is true in the developed world.
This is the reason why certain countries hold favourable comparative advantage in some products, and not in others… This is beautiful aspect of free trade system.
“Secret of economies of scale”
•’Economies of scale’ notion reveals the secret behind the cheap affordable prices of a commodity with large-scale or mass production. In simple words, more the production lesser the price.
•Then, as per this principle, it is in the interest of competing players to produce goods and services in which they have lesser “opportunity cost” and more “consumers and producers surplus”.
Is free trade useful for welfare ?
• Yes, free trade mechanism will definitely help to save more money, resources with greater level of satisfaction for “participants of market”.
In case of non- functionality of comparative advantage and economies of scale, everyone would be loser and economic regression may begin thereafter…
Intensive use of natural resources
Natural resources are intensively used to maintain the comparative advantage in a particular goods and services. So, lesser wastage and loss of resources results in the production activities of free trade system.
Does free trade system help in expanding market?
Yes, it does. It is another importance of free trade system. Market expansion is achieved by increasing the base of market participants in market so that more demand is generated. In this way, market expands more.
Role of multilateral free trade agreements
Multilateral agreements for free trade is essential to make a broad trading network of many trading nations. Because, more the participants, better the benefits.
In spite of all these benefits and importance of free trade system, it isn’t free from negative impacts about which I will discuss in the next blog.