Comparative Advantage Economic Theory Of Free Trade

Free trade is an international trade policy that lowers trade barriers such as tariffs and quotas, stimulates trade activities between countries and limits government intervention. It encourages the free flow of goods and services between nations without any discrimination. Under free trade, countries trade and produce based on their abilities and expertise, extensively promoting international trade. Hence, free trade increases the world's efficiency in production and resource allocation.

Free trade policies are generally characterized as follows:
Implementation of David Ricardo's theory of comparative advantage and division of labor. Dividing each labor with a specialized task will help increase efficiency and reduce cost in the production

The theory was first introduced by David Ricardo in 19th century stating that international trade should be based on the differences in the relative opportunity costs of production. So instead of comparing monetary costs of production, countries must compare their relative opportunity costs of a production- what they give up to produce one type of goods. In a simple comparative advantage model, 2-good 2-country situation, if country A must give up 3 wines to produce 1 cloth and country B must give up 2 wines to produce 1 cloth, country B has a lower opportunity cost of producing cloth. Hence a country should produce and export goods that they have in abundance and cost at a relatively lower opportunity cost than other countries.

The implementation of comparative advantage in free trade thus allows countries to specialize their production which results in higher quality of goods and efficiency of resource allocation. With better resource allocation comes higher world output. For example, the result can be seen in India’s leading position in millet export. India has plenty of land and labor. And with its favorable weather there, it is able to grow and export larger quantity of millet than other

Cheaper imported goods increase the consumers’ purchasing power and encourage them to spend and consume more. Moreover, consumers can substitute goods that are produced domestically at higher prices for cheaper goods from abroad. To give an example for goods substitution, a consumer can choose to buy an imported shower gel that has a cheaper price instead of a locally made soap which could be more expensive.

Also, the chance for a shortage of any goods would be unlikely in the market (under normal circumstances) because a country can easily import the goods they are inefficient in production or those they do not produce at all. Consumer’s needs and demands for different types of goods can always be met with the importation of goods from overseas. As a result, consumers not only enjoy cheaper and wider range of goods, they also benefit from the better quality of the products they