Benefits Of Free Trade

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Lastly through the reduction of trade barriers it can lead to trade creation, which occurs when, the consumption switches from high cost producers to low cost producers. This creation of trade can help not only the economy but consumers as well and have many positive effects. Free trade reduces the prices of goods and services to consumers. These lower prices are a result of increased competitiveness when a country opens its borders. There is more competition therefore this pushes the prices that domestic producers charge down because a lot of the imported goods coming in are cheaper therefore the producer surplus decreases but the consumers surplus increases (Feenstra, 2011). The positive benefits of free trade can be looked at from an economic…show more content…
In combination with the Hecksher-ohlin model as previously discussed it is pretty evident in how a less developed country with labor abundances can really benefit from job creation from free trade. This is because the model will make these countries become labor intensive and this will in turn increase the number of job in the sector. A perfect example of this happening is with the North American Free Trade Agreement and Mexico. Since Mexico is labor abundant the NAFTA proposal made it so that the United States was able to shift it’s manufacturing to Mexico and get cheaper products directly from the South. Even the United States benefitted from job creation in the export related jobs; this is evident in the article, “The impact of NAFTA on US employment”, by Nozar Hashemzadeh. In particular it shows that increased trade between the USA and Mexico created nearly 7,000 jobs in the domestic economy over a 24-month period that extended from January 1994 to December 1995 (Hashemzadeh, 1997). Consequently this shows that due to NAFTA being established the United States was able to see an increase in its domestic jobs and this helps to grow its…show more content…
This rise in labor productivity can happen due to a few factors such as specialization that makes workers focus on repetitive similar tasks to increase production. Another form of increase in labor productivity arises from the new technologies and knowledge that free trade brings to the home country. This new knowledge can come in the form of new and faster production processes and better capital, which increases production. Or it can even come from the increase in foreign competition, which forces domestic producers to improve their production processes in ways to make their products cheaper to compete. Experience in the European Union (EU) countries shows that a 1 % increase in the openness of the economy results in a 0.6 % rise in labor productivity the following year (Luxembourg, 2014). This article shows a definitive connection between the openness to trade and the increase in labor productivity. This is due to the fact that as the European union or any country in general becomes more open, with more free trade there is a more openness to information and technology that passes through the country. This new knowledge and information can further turn into more innovations and technological advancements, which leads to the productivity of labor increasing in the longer
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