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.
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. In 1997 the richest 1 percent of people in the United States owned 39 percent of all the wealth in the country, according to economist Edward Wolff of New York University.
Local manufacturer that produce goods that are higher that free trade price will force to cut down cost or shut down.
They wont be able to compete with imported products that are lower at cost but with the same or better quality.
Big businesses increasingly move factories in and out of different countries. This mobility gives them the power to demand that governments also lower their domestic labor and environmental standards or else the companies will lay off workers and move elsewhere. The result has been called a race to the bottom.
Free trade has also encouraged the use of child labor. The International Labor Organization (ILO), an agency of the United Nations (UN), estimated in 1998 that there were at least 250 million children from the ages of 5 to 14 working for minimal wages.
Researchers at the University of Veracruz in Mexico recently reported that child workers there are exposed to dangerous chemicals, carry heavy loads, and do not get enough nutritious food to eat.
There are approximately two million child workers in Brazil. Many work 10 hours a day producing sisal for rugs, rope, and handbags sold in the United States. According to a report in 2000 in the Washington Post, The sharp blades and processing machines used in the fields have left many children and their parents with punctured eyeballs, missing fingers and amputated arms.
Free trade is not as the phrase suggests a matter of a free trade between consenting countries. The U.
S.A for instance is the first to impose tariffs when its farming interests and .