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Benefits and Costs of International Trade

Benefits and Costs of International Trade

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

Benefits of International Trade

  • High prices for exports and lower prices for imports are a net gain for a country. Efficient allocation of resources is a result of such exchanges. There is an increase in overall welfare because of the larger volume of goods received from such trade engagements.
  • Trade liberalization increases real GDP. Efficient allocation of resources has a positive influence on GDP. International trade offers a platform for the exchange of ideas and flow of technical expertise.
  • Development of high-quality and more effective institution policies encourages domestic innovations. Domestic productivity benefits from foreign development and researchers.
  • Global competition motivates companies to become more efficient because they face an open field. Multinationals also operate on a larger scale leading to cost savings.
  • Consumers access a variety of goods and services at lower prices. This improves the living standards of people. Besides, the absence of restrictions and tariffs eases production and shipment; hence, ensuring sustained availability of goods and services.
  • An increase in competition leads to a fall in monopoly power. The market, therefore, becomes more efficient.
  • Trade encourages efficiency. Thanks to specialization, countries concentrate on producing more goods in whose production they excel instead of those that they cannot produce efficiently.

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 re-allocation or 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 a variety of 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 countries to eastern countries. Westerners have been able to buy goods at cheaper prices, but many manufacturing firms have closed shop at the same time, leaving workers unemployed.

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