An economic theory that describes the impact and export relations of multiple countries is know as Free Trade. When companies and individuals engage in free trade relations countries can import and export goods from government intervention for free. Government intervention can include tariffs, import limits and/or bans on specific goods. Free trade offers several advantages to countries. To national benefits, businesses and individuals can benefits from favorable free trade policies.
If a country cannot efficiently produce an item, it can obtain the item by trading with another country. This can be a comparative advantage of a country. International trade not only results in increased efficiency but also allows countries to participate in a global economy, encouraging the opportunity of foreign direct investment. This is the amount of money that individuals invest into foreign companies and other assets which leads to growth in employment and revenues and it promotes activity, progress and innovation within an economy and improvements in manufacturing quality for both the
This would lead to an increase in national income by a multiple. Here, economic growth would be achieved but it may undermine the objective of a balance of payments surplus. A rise in national income may increase the demand for imports as they are positively associated with national income. The rise in demand for imports may reduce a trade surplus, and could also turn it into a trade deficit. When an economy has a stable rate of economic growth, it produces more output.
7 The employment level is expected to be positively affected by trade liberalization due to ease access to cheap raw material and capital machinery, which promote development opportunities in a country. Trade Liberalization It is the openness index which is represented by trade-GDP ratio i.e the sum of export and imports to that of the GDP. TL= (X+M)/GDP Where X Total exports of country M Total Imports of country GDP Gross Domestic Product of India As export increases the value of trade liberalization also increases and vice versa. . Hence, more openness Human Capital It can be expressed as the skills, knowledge, and experience possessed by an individual or population, viewed in terms of their value or cost to an organization or country.Here,
Both would cause the PPF to shift outwards. Expansion of a given resource will favour the good that uses that resource input intensively. Orthodox mainstream economic models advise that there is a natural relationship between trade and growth; both procedures involve an increase in the value of economic output. In the mainstream economic paradigm, economic growth is often explained as an increase in the economy’s productive capacity. In terms of the Hecker (HO) model, economic growth can be illustrated as an outward shift in the production possibilities frontier (PPF).
Lastly, companies can source cheaper and/or better raw materials from import making them more sustainable and profitable. More choices & competitive price: Monopolies or oligopolies are reduced in certain industries because international trade encourages greater competition which leads to more competitive prices. Consumers not only have the access to the new products or services that are not available in their country but also they get bigger bang for the buck ("The benefits of international Trade,” n.d.). Some negative aspects of international trade:
The truth, that the openness of trade is positively, linked to economic growth of the countries, has helped the trade liberalization and openness to be a necessary part of the developing countries policy measures. By trade openness, it means that the reduction or complete removal of trade barriers and this idea has become very important in the policy making for both the developed and developing economies. There are so many different forms of trade like the transfer of technology, education flow and ideas sharing other than the trade in terms of only commodities. The restrictive trade policies and measures were followed by the developing countries in the start but now they have moved towards the liberalization of trade practices as the world has moved towards globalization. There is a strong support given in the literature of the idea that trade openness acts as an engine of the economic growth and the existing literature supports the positive relation between the different economic variables.
Globalisationhas also reduced trade batrriers and has allowed free flow of gOods, services and labour from one place to another which has allowed countries to specialize in production of goods whichas a result has increased the productivity of firms in countries and minimised thier costs as well.Globaliosation also allows countriesto obtain goods at cheaper prices which could prove to expensive to produce in thier own country.This process also enhances competition between countries through easierflow of goods and services between countires whichis an effective way of enhancing innovation to produce better quality goods. the rise in globalisation has increased capital flow into developing countries. Foriegn direct investment into developing countries stabalises the countrie 's ecomomic situation. However thier will be net capital outflow that couldlead to negative effects on trade. Large capital inflows into countries could be caused by appreciation in exchange erates and inflATIONARY PRESSURE that impacton country 's current acount.
This is referred to as International trade. The removal of trade restrictions that exist between countries which ultimately leads to free flow of goods and services is called trade liberalisation. Trade liberalisation includes removal of tariff and non tariff barriers such as surcharges, duties, export subsidies, quotas, licensing regulations etc. Trade liberalisation mainly started after the World War II when the government decided to remove import restrictions and export subsidies. The government was motivated and believed that reducing the trade restrictions would increase the volume of trade, increase living standards and thereby promote economic growth.
Government subsidies boost some industries by increasing the demand and supply of the goods and services of those industries. Also, the government subsidies correct externalities by encouraging consumption of merit goods and services and encouraging companies with negative externalities to adopt production processes with positive externalities. Additionally, subsidies regulate monopoly of power by strengthening start-ups and business growth thereby creating competition. Government Intervention; Subsidies In the free market, the price mechanisms determine the allocation of resources and spending and preferences of the consumers and supply decisions of businesses intersect thereby determining the equilibrium prices. Since of the price, mechanisms determine resource allocation, inefficiency arises.