02.+Advantages+of+Free+Trade

Benefits of Free Trade. This explains that by specialising in goods where countries have a lower opportunity cost, there can be an increase in economic welfare for all countries. Trade creation occurs when consumption switches from high cost producers to low cost producers As well as benefits for consumers importing goods, firms exporting goods where the UK has a comparative advantage will also see a big improvement in economic welfare. Lower tariffs on UK exports will enable a higher quantity of exports boosting UK jobs and economic growth. If countries can specialise in certain goods they can benefit from [|economies of scale] and lower average costs, this is especially true in industries with high fixed costs or that require high levels of investment. The benefits of economies of scale will ultimately lead to lower prices for consumers. With more trade domestic firms will face more competition from abroad therefore there will be more incentives to cut costs and increase efficiency. It may prevent domestic monopolies from charging too high prices. World trade has increased by an average of 7% since the 1945, causing this to be one of the big contributors to economic growth. Middle Eastern counties such as Qatar are very rich in reserves of oil but without trade there would be not much benefit in having so much oil. Japan on the other hand has very few raw material without trade it would be very poor. If an economy protects its domestic industry by increasing tariffs industries may not have any incentives to cut costs.
 * 1. The theory of comparative advantage.**
 * 2. Reducing Tariff barriers leads to trade creation**
 * The removal of tariffs leads to lower prices for consumers and an increase in consumer surplus of areas 1 + 2 + 3 + 4
 * Imports will increase from Q3-Q2 to Q4-Q1
 * The govt will lose tax revenue of area 3
 * Domestic firms producing this good will sell less and lose producer surplus equal to area 1
 * However overall there will be an increase in economic welfare of 1+2+3+4 - (1+3)
 * The magnitude of this increase depends upon the elasticity of supply and demand. If demand elastic consumers will have a big increase in welfare
 * 3. Increased Exports.**
 * 4. Economies of Scale:**
 * 5. Increased Competition.**
 * 6. Trade is an engine of growth**.
 * 7. Make use of surplus raw materials**
 * 8. Tariffs may encourage inefficiency**

[]