Free Trade – does it always produce good outcomes?


Trade has the potential to create a win-win situation for buyers and sellers and thereby improve their living standards. We all have direct first-hand experience of trade and history is replete with examples of new trade routes leading to better living standards for those involved in the new transactions. This intuitively obvious perception was given a theoretical underpinning by the theory of comparative advantage which is accredited to David Ricardo.

With a simple two country, two product model this theory shows that by specialising and trading with each other countries can utilise the same inputs and yet increase their combined output. Both countries can then be better off by trading this increased output. This is a somewhat counter-intuitive insight when you have one country that has an absolute advantage in producing both goods over another country. However as long as there is a difference in opportunity costs (i.e. a comparative…

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