In a two-country world, the opening of free trade does not make everyone in the two countries better off. If we focus on a single product, which group in each country is better off? Which is worse off? What assumption(s) must be made to make the claim that both countries do in fact benefit from the free trade?

Question

What will be an ideal response?

Answer 1

POSSIBLE RESPONSE: It is true that free trade does not benefit everyone within a country. The gainers in the importing country are the consumers.  They enjoy lower prices, and possibly a wider variety of the product. The producers in the exporting country, who are expanding their production as they are receiving a higher price by accessing foreign demand through free trade, also gain. The losers are the consumers of the product in the exporting country and the import-competing producers. If we accept the one-dollar one-vote metric to measure the national well-being of a country, we find that there are net national gains from trade. The assumption is that we value each dollar of gains and losses of different groups equally. In each country the gainers are gaining more than the losers are losing.