Question

In addition to the positive welfare effects that free trade has on an economy, there are a variety of other benefits of international trade. Consider the following scenario:

Without free trade, Rooby has market power as a local producer. Once free trade is implemented in the local economy, Rooby is no longer able to raise its prices above competitive levels.

The previous scenario represents which of the following benefits of free trade?

Increased variety of goods
Enhanced flow of ideas
Increased competition
Lower costs through economies of scale

Answer 1

Answer:

The scenario described by the question represents an increase in competition - option 3.

Explanation:

There are specific gains from trade. Production possibility curve protrudes outward, symbolizing an increase in the production of output.

Competition becomes more severe, with the occurrence of free trade, this is due to an increase in the variety of goods available to customers. This is so because domestic producers face stiff competition from the foreign market.

Thus, the scenario described by the question represents an increase in competition - option 3.