Advantage and disadvantage of free trade and theorys of International trade law
Topic: Advantage and Disadvantage
of free trade and theory of
international trade law
Id of the group members:
The process of buying goods and services from the rest of
the world (importing) and that of selling goods and
services to the rest of the world (exporting) is referred to
as international trade
International trade is the exchange of capital, goods, and
services across international borders or territories.
What is Free Trade?
Occurs when there are no artificial barriers
put in place by governments to restrict the
flow of goods and services between trading
Reasons for Trade
Differences in Factor endowments
Variety and quality of goods
Gains from specialization
Advantage of free Trade
2.Variety of products
4.Developing international relationship
6.Promoting rule of law
7.Promoting free flow of trade
8.Benefit of consumer
Disadvantage of free trade
1.effecting national economic
2.threat to small trades
3.reducing the demand local product
4.vulnerability in international law.
1. Absolute cost/ advantage theory
2. Comparative advantage theory
Theory's of international trade law
Scottish moral philosopher
“Father of Modern
Wrote “The Wealth of
Famous for writing about
“The wealth of Nation”.
Absolute cost/ advantage theory
According to Adam smith on his book of “The wealth of Nation” (1776).
He have mention about an absolute advantage as advantages of grater
output of goods & services when other nations cannot produce same
amount of goods and services while utilizing same amount of resources.
He refer an examples as giving the Absolute advantage of English textile
manufacture & the French world wide efficient wine Industry.
Due to the having of favorable climate, good soils, Accumulated expertise
the French has the most efficient wine among the world. This indicate that
the specialization on nation Advantage is more beneficial in today
Absolute Advantage theory
Absolute cost advantage theory of international trade to
remove drawbacks and to increase trade between to
A country has an absolute advantage in the production
of a good when it can produce more of that good than
another country with the same resources.
Assumptions of the theory
Trade is between two countries
Only two commodities are traded
Free trade exists between the countries
They only element of cost of production is labor.
Smith express an idea that A nation never supposed to produce goods and
services which they can find more cheaper and qualitative from other nations.
Therefore, specialization in the production of goods and services which they
have an absolute advantages will help two different nation engaging on their
So when a country specialize in particular kind of products they don’t
supposed to produce all kinds of products which all it consume and utilize all
kind of resources as well. According to the absolute advantage theory,
international trade is a positive-sum , because there are gains for both countries
to an exchange.
USA has an absolute advantage for producing Wheat.
China has an absolute advantage for producing electronic goods.
India has an absolute advantage on cheap labor etc..
Country A can produce 1,000 parts per hour with 200
Country B can produce 2,500 parts per hour with 200
Country C can produce 10,000 parts per hour with 200
_______has the absolute advantage.
A famous economist named David Ricardo (1772-1823)
came up with the law of comparative advantage.
According to this law, specialization and free trade
benefits all trading partners.
Countries should specialize in those goods they have a
comparative advantage in.
The loss of potential gain from other alternatives
when one alternative is chosen.
Comparative advantage is the basis for all trade
between individuals, regions, and nations.
The ability of a firm or individual to produce goods
and/or services at a lower opportunity cost than other
firms or individuals. A comparative advantage gives a
company the ability to sell goods and services at a
lower price than its competitors and realize stronger
A person has a comparative advantage if s/he can
produce something at a lower cost than others.
This is not the same as being the best at something.
With Comparative Advantage, everyone wins through
Those with absolute advantages can buy goods and
services from businesses who produce them at a
comparatively lower cost.
Comparative Advantage theory
India can produce 4,000 yards of textile per day or 1
ton of chocolate per day.
Nepal can produce 1,000 yards of textile a day or 4
tons of chocolate per day.
India has a comparative advantage in producing
Nepal has a comparative advantage in chocolate.
Assume two countries, UK and India
They both produce textiles and books.
Their relative production levels are shown in the
Output without trade
UK 1 4
India 2 3
Total 3 7
For the UK to produce 1 unit of textiles it has an
opportunity cost of 4 books.
However for India to produce 1 unit of textiles it has
an opportunity cost of 1.5 books
Therefore India has a comparative advantage in
producing textiles because it has a lower opportunity
The UK has a comparative advantage in producing
books. This is because it has a lower opportunity cost
of 0.25 (1/4) compared to India’s 0.66 (2/3)
If each country now specializes in one good then
assuming constant returns to scale output will double
UK 0 8
India 4 0
TOTAL 4 8
Therefore total output of both goods has increased illustrating the gains from
By trading the surplus books and textiles, India and UK can enjoy higher
quantities of the goods.
Output after trade