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Free trade in economics and business

1. What are two reasons economists support free trade?

2. One of the basic economic laws is "the law of one price." It says that given certain assumptions, one would expect that if free trade is allowed, the prices of goods in countries that trade with each other should converge.

a. Can you list what three of those assumptions likely are?
b. Should the law of one price hold for labor, also? Why or why not?
c. Should it hold for capital (financial resources) more so or less so than for labor? Why or why not?

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1) Free trade implies the elimination of barriers that restrict the flow of goods & services between countries. Economists' supports free trade by considering the economic benefits that arises due to free trade. The most important argument for free trade emerges by considering the comparative advantage. As it is possible for nations to have comparative advantage in at least one good, by specializing in that good, countries can enjoy more welfare. Existence of comparative advantage increases the world output through trade & it is possible for the consumers to buy the goods at low prices. Besides, free trade increases the job opportunities & income of the people. Thus, specialization & increased efficiency through free trade increases the welfare of the world economies.

Underlying the consensus among economists on the desirability of free trade is the judgment that nations are better off with free trade than with policies restricting trade. Another major argument among the economists is concerned about increasing returns to scale from larger markets. Increasing returns occurs when an identical percentage increase in the use of each productive input causes an even ...

Solution Summary

Free trade is summarized.