Free Trade Allows Countries to Exploit Comparative Advantage

Freer trade — from reduced tariffs, regulations and
restrictions — permits an economy to make better use of its resources but does
not automatically give a country a new and much higher growth rate. Its main
benefit is its effect on the level of output rather than on the long-term rate
of growth.

One way that trade contributes to an increase in economic
output is through comparative advantage, which creates more value with the same
resources. A country has an absolute advantage in producing a good (say rugs)
when it can produce it more efficiently than another country, making more in a
shorter period of time. Comparative advantage comes into play when that country
chooses to let the second country produce rugs less efficiently so it can
devote those same resources to producing something else the second country
can’t produce, something more beneficial like computers. Then it trades some of
the computers for rugs. Now both countries have rugs and computers, whereas
before they both were competing to only make rugs. Trade barriers impede this
process and make the costs of goods more expensive for both countries.