If the country has the opportunity to trade at the international price ratio as indicated by the slope of T’T’ and if it adjusts its domestic production at point B, thus producing OW 1 of wheat and OC 1 of cloth, consumption at all points on T’T’ line is possible. The domestic price ratio is given by the slope of TT. Suppose, in the absence of international trade, the country is at point A and producing and consuming OW of wheat and OC of cloth. In the absence of trade, all the points on PP curve show the country’s possible production and consumption alternatives. It is concave to the origin indicating the increasing cost conditions in order to produce more of one good, increasing amounts of other good are to be given up. PP is the production possibility curve of a country. But, through international trade, the consumption possibilities of the country can expand beyond its production possibilities.įigure 1 illustrates the consumption optimisation gain from free trade. In the absence of international trade, a country’s domestic consumption is limited to its production possibilities. In the words of Ingo Walter, “The world as a whole is certainly materially better off under free trade than with no trade at all and so is the individual nation,įree trade helps the trading countries to secure the optimisation of consumption. Under such a policy, all barriers to the international movement of goods are removed and the trade between the countries is allowed to take its natural course.Īccording to Adam Smith, free trade is “that system of commercial policy which draws no distinction between domestic and foreign commodities and, therefore, neither imposes additional burdens on the latter, nor grants any special favours to the former.” Penguin Dictionary defines free trade as “the condition in which the free flow of goods and services in international exchange is neither restricted nor encouraged by direct government intervention.” Free trade policy is also known as the laissez- faire policy, i.e., the policy of government non-interference in foreign trade.
Under free trade, the distinction between domestic trade and international trade disappears. Free trade refers to a condition of international trade when all kinds of artificial controls on international trade, such as tariffs, quotas, etc.
Essay on Free Trade: Arguments for and against!įree trade means free and unrestricted movement of goods between countries.
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