Costs and Benefits of International Trade

Most economists agree that the advantages of international trade overweigh the 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 pay lower prices for imports (instead of producing them at a higher cost), which in turn enables a more efficient resource allocation as a country will increase its production of the goods it exports and reduce its production of the goods it imports.
• Trade liberalization increases real GDP: efficient resource allocation, learning by doing, higher productivity, knowledge spillovers, and trade-induced changes in policies that affect incentives for innovation are all factors that can increase a country’s GDP.
• International trade offers a platform for exchanging ideas and for the free flow of technical expertise.
• International trade can lead to the development of better-quality institutions and policies that encourage domestic innovations.
• Greater efficiency in that countries that have a comparative advantage in the production of a specific commodity will specialize in the production of the said commodity.
• Industries experience economies of scale: Many industries, for instance, the automobile industry in Europe, experience economies of scale. As these industries grow and have larger market sizes, their average production costs per unit 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 in developed countries caused by competition from importing from other countries.
• Less efficient firms may exit the market as a result of resource reallocation in an industry depending on whether it is exporting(expanding) or facing import competition(contracting). As the less efficient farms exit the market, unemployment rates increase in developed countries and there may be need to retrain the displaced workers for jobs in expanding (exporting) industries.

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 from 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.