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International Trade

The Argument for Free Trade

Obviously, the example here is incredibly oversimplified. In the real world, there are hundreds of nations producing thousands of products, most with different cost structures and at different levels of efficiency. However, in this simple example is the fundamental argument for free trade, which most economists support both in theory and in practice.

Economists support free trade because in general they want an economy, including the global economy, to deliver the greatest good to the greatest number of people. A look back at the example of U.S. and Japanese food and computer production will reveal the benefits of specialization and exchange.

If you pick any possibility from the range of production possibilities in Tables 17.1 and 17.2, you will see that the greatest total production of food and computers occurs when the United States produces only food and Japan produces only personal computers. The following table below shows one example:

Table 17.3
 FoodComputers 
Possibility C:   
United States6,000 6,000 
Japan2,000 6,000 
Total8,00012,000Total production = 20,000 units
    
With Specialization:   
United States12,000 0 
Japan 0 12,000 
Total12,00012,000Total production = 24,000 units

Specialization generates the highest level of production of the two goods. Then, through trade, each nation can consume the amount of the good that it wants to consume. In this way, production is maximized because each nation is doing what it does most efficiently.

Again, this is an oversimplification. A range of issues, including transportation costs, quality, differences in domestic demand, and national security considerations, are all left out of the analysis. Yet the very real principle of comparative advantage and the equally real benefits of trade form the basic argument in favor of free trade.

Unfortunately, numerous arguments—and measures—against free international trade have taken hold in the world.

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Excerpted from The Complete Idiot's Guide to Economics © 2003 by Tom Gorman. All rights reserved including the right of reproduction in whole or in part in any form. Used by arrangement with Alpha Books, a member of Penguin Group (USA) Inc.

To order this book direct from the publisher, visit the Penguin USA website or call 1-800-253-6476. You can also purchase this book at Amazon.com and Barnes & Noble.

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