Gains from trade using supply and demand analysis

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The diagram shows Japan can produce camcorders at lower costs - its supply curve is lower than the UK. This means that Japan has a comparative advantage in producing camcorders. In the absence of international trade between the two countries, British consumers would have to buy at a higher equilibrium price than Japanese consumers. Since Japan is more efficient, it makes sense for Japan to specialise in production of camcorders and export their surplus output to the UK at a lower free trade price. At the intermediate price shown in the diagram, (the free trade price) Japan sells exports to the UK for a higher price but this is still lower than the UK equilibrium price. Japan receives revenue from the sale of these exports. UK consumers can now buy more camcorders at a lower price and have more choice in the market We are ignoring transportation costs between the two countries and we are assuming that the resources that were previously allocated to producing camcorders in the UK can be reallocated to other industries (i.e. resources are assumed to be occupationally mobile). Free trade, interchange of commodities across political frontiers without restrictions such as tariffs, quotas, or foreign exchange controls. This economic policy contrasts with protectionist policies that use such restrictions to protect or stimulate domestic industries. In this article I will discuss the positive and negative effects of free trade. Trade can lead to an improvement in overall economic welfare if countries specialize in the products in which they have a production advantage. Trade allows businesses to exploit economies of scale by operating in international markets. International competition stimulates higher efficiency and reduces monopoly power. Trade enhances consumer choice and international competition between suppliers helps to keep prices down. Trade in ideas stimulates product and process innovations that generates better products for consumers and enhances the overall standard of living. Negative effects: Within countries, the gap between rich and poor has also generally increased. In the United States wealthier people tend to receive more income from owning shares of companies, while poor and middle income people get most of their income from wages and salaries. If a company makes more profits by moving its production offshore, those who own its shares will see their incomes rise while those people who lost their jobs will see their income fall. So as the trade deficit has increased, the rich have gotten richer and the poor have gotten poorer.

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