The Argument For Free Trade Essay

1015 Words Oct 8th, 2016 5 Pages
The argument for free trade is based on the theory of comparative advantage.
Let assume there are two countries, East and West, which both produce two kinds of goods, bicycles and wheat. In a year, an Eastern worker can make two bikes or grow four bushels of wheat. A Westerner, however, can manage only one bushel or one bike. Each country has 100 workers, and initially both of their workforces are split evenly between the two industries. So East produces 200 bushels of wheat and 100 bicycles, whereas West produces 50 bushels and 50 bikes.
Since East can produce both wheat and bicycles more cheaply than West, it has an absolute advantage in both industries. Even so, Easterners will benefit from trading with Westerners. This is because East is relatively more efficient at growing wheat, where it is four times as productive as West, than it is at making bikes, where it is only twice as productive. In other words, it has a comparative advantage in wheat.
At the same time, West has a comparative advantage in making bikes, even though it has no absolute advantage in anything. According to Ricardo’s theory, both countries will be better off if each specializes in the industry where it has a comparative advantage, and if the two trade with one another. Specialization increases world output.
Suppose that East specializes in wheat growing, shifting ten workers from its bicycle factories to its fields, and producing 240 bushels and 80 bikes. West moves 25 workers from wheat farming…

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