Free Trade
What is Free Trade?
Free trade is international trade conducted without government barriers such as tariffs, quotas, or subsidies.
It lets countries specialize according to comparative advantage, raising total output and consumer welfare. While it lowers prices and widens choice, it can hurt specific domestic industries. Agreements like USMCA promote it.
Free Trade: a worked example
Alva and Boreth each have one day of factory time. Alva can produce 60 shirts or 20 laptops, Boreth 30 shirts or 30 laptops. Inside Alva one laptop costs 60 ÷ 20 = 3 shirts, while inside Boreth one laptop costs 30 ÷ 30 = 1 shirt, so Boreth holds the comparative advantage in laptops. Alva holds it in shirts, which cost one third of a laptop there against a full laptop in Boreth. Splitting the day evenly without trade gives 30 shirts plus 10 laptops in Alva and 15 shirts plus 15 laptops in Boreth, a combined 45 shirts and 25 laptops. Full specialization yields 60 shirts and 30 laptops, so opening trade adds 15 shirts and 5 laptops from identical resources. Any price between 1 and 3 shirts per laptop leaves both countries better off.
The mistake students make with free trade
Opportunity cost gets inverted whenever the table shows output rather than input. Seeing Alva produce 60 shirts or 20 laptops, students write that one laptop costs 20 ÷ 60 = 0.33 shirts, because dividing the smaller number by the larger feels like finding a cost. With an output table, divide the other good's output by the output of the good you are pricing, staying inside one country's row: one laptop costs 60 ÷ 20 = 3 shirts. Dividing across the two rows instead compares absolute advantage, which settles nothing about who should specialize.
Free Trade questions
Why do economists support free trade?
Free trade lets each country specialize where its opportunity cost is lowest, so the same labor and capital produce more total output. Consumers get lower prices and wider choice, and competition pushes domestic firms toward efficiency. The gains are net gains, meaning the winners could in principle compensate the losers and still come out ahead. Economists disagree far less about whether trade raises total output than about how the gains and losses get distributed.
Who loses from free trade?
Workers and firms in industries competing against cheaper imports lose. When a domestic textile plant cannot match an imported price, output and jobs shift toward the export sector, and displaced workers may need retraining or relocation to follow them. Losses concentrate in a few towns and industries while the gains spread thinly across every consumer, which is why protection stays politically popular even when it lowers total welfare.
How do you find the terms of trade?
Terms of trade must sit between the two countries' opportunity costs for the good being traded. If one laptop costs 3 shirts at home and 1 shirt abroad, any price between 1 and 3 shirts per laptop leaves both sides with a gain. A price of 2 shirts per laptop sits midway and divides that range evenly. Outside the range one country does better producing the good itself and refuses the deal.
This is the live International Trade sandbox. Drag the curves, or open the full version.
Related terms
Common comparisons
Get AP Econ exam tips in your inbox
Occasional emails with study tips, new interactive graphs, and exam-season reminders. Free, no spam.
No spam. Unsubscribe anytime. Read our privacy policy.
Keep track of what you have studied
A free EconLearn account adds progress tracking, your quiz history, and achievements. Studying here is free either way, and there is nothing to pay for as a student.
Create a free accountAlready have one? Sign in
Last updated