Trade And Prosperity

Trade and Prosperity

Free trade is the act of exchanging goods or services between countries for minimal tariffs or fees. Between countries, this is a method of exchange that is gaining more and more popularity. By importing and exporting for low fees, free trade is an efficient way to cover up weaknesses in the country and gain on strengths. Free trade is a very controversial topic that is viewed upon differently by many people in many different countries. Some oppose free trade; they feel it will cause production losses or low employment in their country. Many countries also embrace it and believe it helps create a strong and healthy nation. They join in free trade organizations or draft free trade agreements with other countries to try and capitalize on the potential benefits. In Canada, free trade with other countries is embraced and as a direct result, both business and consumers experience great economic and social prosperity.

Ask any economist and they will tell you one of their main principles, which they rely on as if it were a verse from the bible, is: "free trade makes everyone better off (Mankiw, Kneebone, McKenzie & Rowe 9). To explain this, the terms opportunity cost and comparative advantage must first be defined. The opportunity cost of an item is whatever that must be given up to attain that item (Mankiw, Kneebone, McKenzie & Rowe 53). For instance, if you are a farmer and decide to harvest corn all today, you are deciding not to feed the chickens or milk cows. Thus, the opportunity cost to attain corn would be the milk or eggs that you cannot gather. When producing goods, each country has an opportunity cost for an item. They cannot produce every single item they want; some good must be given up in order to attain other goods. For example, Canada may have the decision on whether they should allocate resources to manufacture 500 computers or 1 car. The opportunity cost for one computer would be the number of cars that can be produced divided by the number of computers that can be produced, which is 0.002 cars. Alternatively, the opportunity cost for one car would be the number of computers divided by the number of cars, which are 500 computers. Consider also, for instance, that another country, Japan, could produce 1000 computers for every 1 car. Then, Japan's opportunity cost for computers would be 0.001 cars. When comparing computers, whoever has the lowest opportunity cost is said to have a comparative advantage in producing that product (Mankiw, Kneebone, McKenzie & Rowe 54). The comparative advantage for computers, then, would go to Japan because they are more efficient at making them. They produce more computers and give up less than Canada does.

Because Japan has the comparative advantage in producing computers in that example, free trade would maximize both country's production by having Japan specialize in producing computers and Canada specialize in producing cars. Then, both countries could trade the products they specialize in for the other, at a fair rate to be determined separately. Without free trade, each country had a bigger limit on what good they could produce. With trade, both countries still have a limit to what the countries can produce, but since they are trading what they are best at producing, they are maximizing the total numbers of goods in the country. Thus by trade at a fair, un-taxed rate, they are capable of having more goods and services in their country and any given time. Both countries are able to produce the best they can and thus from trade, they receive the most of the other good as they possibly can. This is known as the law of comparative advantage (Mankiw, Kneebone, McKenzie & Rowe 55).

In Canada, the law of comparative advantage produces enormous benefits for both consumers and producers. First, by establishing trade connections with other countries, it allows Canada to specialize in producing what it is best in producing. No longer does the country have to produce products that are inefficient to produce, Canada can just focus on what it is good at making. Then, by trade, Canada can gain those products they are poor at making (Bhagwati 50). Therefore, free trade has maximized the amount of products that are being transferred around and it promotes the reduction in the amount of inputs required and promotes efficiency. Businesses then get to sell more products to customers and generate higher profits, which can then increase jobs in Canada and lead to a healthier economy. Many of the resources that a business needs to produce a certain good are traded as well. Free trade allows for a more efficient method to attain these resourceful products and businesses are able to increase their productivity. This is a great help to businesses since it increases their efficiency, allowing them to waste less. Businesses are thus able to produce a greater quantity of outputs with ease and are also able to generate much higher revenues (Bhagwati 52).

Not only do producers benefit, but Canadian customers also gain considerably. When producers produce large amounts of a good with lower amounts of resources, they can then sell them at a lower price as well. Canadian customers react by buying more. Customers undoubtedly gain from the lower prices that result from free trade in Canada. When businesses are able to attain the inputs needed to create a product in a more efficient way, the product then gains in quality (Murphy). Regardless of whether the product is a good or service, the quality goes up. When the resources for a product are made in a country that specializes in their production, the inputs are created more efficiently and effectively. Producers can thus attain more of an input, which generates more of an output as well. Less waste is being produced in the manufacturing process and higher quality is the end result. Customers in Canada would thus be able to attain a better overall product. Consumers also benefit from getting a wider variety of products (Bhagwati 62). Some products can only be produced in other countries and Canada does not have the resources to make them. This, simply, is due to the Canada's inability to possess the methods or resources necessary to create the good. With trade, we are able to import the products we are unable to produce. Free trade allows for this transaction to be done more efficiently and effectively. No additional fees are needed to be paid for such rare goods, so a larger amount of them will be imported to Canada at the lowest price possible. This generates a wider variety of goods that can be accessible to Canada. Consumers would then be benefiting by getting a wide assortment of products that were previously unattainable. This creates more consumer satisfaction, giving them more products to consume and use for their own joy.

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