The Advantages of Free Trade (SL IB Economics)

Revision Note

Steve Vorster

Expertise

Economics & Business Subject Lead

The Benefits of International Trade

  • International trade refers to the exchange of goods and services between countries
  • International trade involves the exchange of goods/service through exports and imports
  • International trade is 'free' when there is no government intervention (quotas, taxes etc.) to reduce or limit trade

6-2-2-the-benefits-of-free-trade
The benefits of free trade

  • Greater choice: with access to a wider variety of goods/services, the standard of living improves
  • Lower prices: with international competition prices fall giving households the ability to buy more
  • International cooperation: required for trade helps countries to build better relationships which leads to lower levels of hostilities
  • Flow of new ideas: innovative ideas and technology can be shared between countries
  • Access to resources: output can increase and costs of production can fall with increased access to raw materials
  • Increased efficiency: international competition allows the most efficient firms to emerge and this improves the use of global resources
  • Economic growth: exports are a key component of the gross domestic product of many countries and an increase in exports can lead to economic growth
  • Economic development: Increased output leads to lower levels of unemployment which leads to higher incomes and a higher standard of living

Diagrammatic Illustration of the Benefits of Free Trade

  • The benefits of free trade are best understood when analysing markets in which:
    • The world price for a good/service is above the domestic price thus allowing for exports
    • The world price for a good/service is below the domestic price thus encouraging imports

 

1. World price is above the domestic price

 

4-1-1-diagrammatic-illustration-of-free-trade---pw-above-world-price

When the world price (WP) is above the domestic equilibrium price (PE ), a country's firms are able to export the excess supply

 

Diagram Analysis

  • The domestic equilibrium in the market for rice in Vietnam is at PeQe
  • The world price of rice is higher at Pw
  • Vietnamese rice producers are incentivised by the higher prices to produce a higher level of output and domestic supply increases from Qe to Qs
  • Vietnamese consumers now have to pay the world price for rice (Pw) and the domestic demand contracts from Qe to Qd
  • The excess domestic supply (Qs- Qd) is now available for export

 

2. World price is below the domestic price
 

4-1-1-diagrammatic-illustration-of-free-trade---pw-below-world-price

When the world price (Pw) is below the domestic equilibrium price (Pe), households and firms are incentivised to increase their imports

 

Diagram Analysis

  • The domestic equilibrium in the market for bananas in Sri Lanka is at PeQe
  • The world price of bananas is lower at Pw
  • Some of Sri Lanka's firms cannot compete with the lower prices and domestic supply contracts from Qe to Qs
  • Sri Lanka consumers benefit from the lower world price (Pw) and the domestic demand extends from Qe to Qd
  • The excess domestic demand (Qd- Qs) is now met through imports

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Steve Vorster

Author: Steve Vorster

Expertise: Economics & Business Subject Lead

Steve has taught A Level, GCSE, IGCSE Business and Economics - as well as IBDP Economics and Business Management. He is an IBDP Examiner and IGCSE textbook author. His students regularly achieve 90-100% in their final exams. Steve has been the Assistant Head of Sixth Form for a school in Devon, and Head of Economics at the world's largest International school in Singapore. He loves to create resources which speed up student learning and are easily accessible by all.