Unit 4 Macro: Broader Economic Benefits of Trade

Many countries have seen a growing share of their GDP directly linked to overseas trade - trade has many positive spillover effects

Some of the broader gains from trade are:

1. Welfare gains: Supporters of trade believe that trade is a ‘positive-sum game’ – all counties engaged in open trade and exchange stand to gain
   
2. Economies of scale – trade and increased market size allows firms to exploit scale economies leading to lower average costs of production that might be passed onto consumers
   
3. Competition / market contestability – trade promotes increased competition particularly for domestic monopolies that would otherwise face little competition. Trade is a spur for higher productivity – a stimulus to higher business efficiency across many industries.
   
4. Dynamic efficiency gains from innovation - trade enhances choice and stimulates product and process innovations bringing better products for consumers and enhances the standard of living
   
5. Access to new technology and inflows of new knowledge: trade, like investment, is a mechanism by which countries can have access to new technologies. Trade is a stimulus to the exchange of ideas and inflow of human capital. Openness to trade allows imports of capital equipment at lower prices.
   
6. Rising living standards and a reduction in poverty - a growing body of evidence shows that countries that are more open to trade grow faster over the long run and have higher per capita income than those that remain closed. Growth through trade directly benefits the world's poor although free trade is not necessarily equitable