(a) Using the neoclassical production-possibilities frontier/indifference curve approach, build the case that free trade is preferable to autarky for a country. Then explain how an economist could still say that trade can be beneficial to the country even if trade causes the community indifference curve map to change such that the country appears to lose welfare on the basis of the original autarky income distribution.
(b) It has often been pointed out in this course that, within a country, a movement to freer trade, while helping some people, can hurt other people. Thinking over various parts of this course, indicate two groups of people within a country who can have their well-being reduced because of the opening of the country to trade and very briefly explain why their welfare can be reduced.

Question

Quizplus · Accepted Answer

The Answer is (a) The neoclassical production-possibilities frontier/indifference curve approach argues that free trade is preferable to autarky for a country because it allows the country to specialize in the production of goods and services in which it has a comparative advantage. This specialization leads to increased efficiency and higher overall production, which in turn leads to a higher level of consumption and welfare for the country as a whole.

Even if trade causes the community indifference curve map to change such that the country appears to lose welfare on the basis of the original autarky income distribution, an economist could still argue that trade can be beneficial to the country. This is because trade allows for the possibility of gains from specialization and exchange, which can lead to overall efficiency gains and higher levels of consumption. Additionally, trade can lead to the transfer of new technologies and ideas, which can further enhance the country's productivity and welfare in the long run.

(b) Two groups of people within a country who can have their well-being reduced because of the opening of the country to trade are:
1. Workers in industries that face increased competition from foreign producers: When a country opens up to trade, domestic industries that were previously protected may face increased competition from foreign producers. This can lead to job losses, lower wages, and reduced job security for workers in these industries.

2. Small-scale farmers and producers: Opening up to trade can also hurt small-scale farmers and producers who may not be able to compete with larger, more efficient foreign producers. This can lead to a decline in their income and livelihood, as well as a loss of traditional farming practices and cultural heritage.

Overall, while free trade can bring about benefits for a country as a whole, it is important to recognize and address the potential negative impacts on specific groups within the country. Policymakers should consider implementing measures to support and retrain affected workers, as well as provide assistance to vulnerable groups to ensure that the benefits of trade are more evenly distributed.

(A) Using the Neoclassical Production-Possibilities Frontier/indifference Curve Approach, Build the Case