FREE TRADE
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Help me to understand the following statement: "Using free markets and the price system always results in a more efficient resource allocation than central planning. Just look at what happened in Eastern Europe."
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Solution Summary
Pros and cons of free markets are presented.
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In Eastern Europe, central planning did not succeeded.
ARGUMENTS FOR FREE TRADE
Classical economic analysis indicates that free trade increases the global level of output because free trade permits specialization among countries.
Specialization allows nations to devote their scarce resources to the production of the particular goods and services for which that nation has a comparative advantage.
The benefits of specialization, coupled with economies of scale, increase the global production possibility frontier. An increase in the global production possibility frontier indicates that the absolute quantity of goods and services produced is highest under free trade. Not only are the absolute quantity of goods and services higher, but the particular combination of goods and services actually produced will yield the highest possible utility to global consumers.
Free trade policies are often associated with ...
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