Costs and Benefits of International Trade

The costs and benefits of trade elicit much interest in most countries. However, most economists agree that the advantages of international trade probably outdo its disadvantages. Below are the main benefits and costs associated with international trade.

Benefits of International Trade

• Countries gain from exchange and specialization: Countries receive high prices for exports and lower prices for imports, creating a net gain for the country. International trade fosters specialization through comparative advantage.
• Trade liberalization increases real GDP: Efficient allocation of resources has a positive influence on GDP. International trade offers a platform for exchanging ideas and flowing technical expertise.
• Efficient resource allocation: Through trade, resources are directed towards producing goods that a country is efficient at producing, leading to a more optimal use of resources. Efficient allocation of resources also may lead to an increase in real GDP.
• Industries experience economies of scale: Many industries experience economies of scale. For instance, the automobile and steel industries benefit from increasing returns to scale. This means that as these industries grow and have larger market sizes, their average production costs decrease.
• Increased competition: Foreign competition can reduce the monopoly power of domestic firms, pushing them to become more efficient.

Costs of International Trade

• Loss of jobs and inequality in income caused by competition: As states concentrate on free trade, the domestic industries adjust to this change. As a result, they exist as the main exporters. However, their products face competition from imports.
• Less efficient firms exit the market: This happens due to the reallocation of resources according to whether a firm is expanding or contracting. As firms close, some countries bear heavier losses than others.
• An increase in imports causes domestic industries to compete against imports: Technology and capital might not be very well-developed in some countries. As such, they cannot fairly compete against some industries in developed countries.

Question

Among the following, which one is least likely a cost of international trade?

1. Loss of jobs.
2. Inequality in income.
3. Availability of products.

Solution

The correct answer is C.

Due to the removal of tariffs and restrictions, companies produce and ship various goods across the globe. The consumer can then choose among all of these products.

A and B are incorrect. Some costs, such as inequality in income and unemployment, can be incurred. This has been seen in the past few decades, where most manufacturers have moved from Western to Eastern countries. Westerners have been able to buy goods at cheaper prices, but many manufacturing firms have closed shop simultaneously, leaving workers unemployed.