Why do countries trade, and should trade be free or protected?
Absolute and comparative advantage and the gains from trade, the patterns of trade, the arguments for and against protectionism, and the role of trading blocs and the WTO.
An answer to AQA A-Level Economics 4.2.8, covering absolute and comparative advantage and the gains from trade, the arguments for and against protectionism, the methods of protection, and the role of trading blocs and the WTO.
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What this dot point is asking
AQA wants you to explain absolute and comparative advantage and the gains from trade, evaluate the arguments for and against protectionism, describe the methods of protection, and explain trading blocs and the WTO. Comparative advantage calculations and tariff diagrams are both common.
Absolute and comparative advantage
The theory assumes free trade, no transport costs, factor mobility within countries, and constant returns to scale. In practice transport costs, trade barriers, the immobility of workers between industries, and diminishing returns limit the gains, and over-specialisation can leave a country vulnerable. These assumptions are the main evaluation points when a question asks whether comparative advantage really makes both countries better off.
Patterns and the gains from trade
World trade has shifted from primary commodities towards manufactures and, increasingly, services and digital trade, organised through global value chains. The gains from trade include lower prices and greater choice for consumers, access to larger markets allowing economies of scale, the transfer of technology, and stronger competition that raises efficiency. These gains are the macro counterpart of the microeconomic case for specialisation and the division of labour.
Protectionism
- Arguments for. Protecting infant industries until they reach efficient scale, supporting strategic or declining industries, safeguarding jobs, countering dumping (selling below cost), and raising government revenue from tariffs.
- Arguments against. Higher prices and less choice for consumers, productive inefficiency from sheltering uncompetitive firms, the deadweight welfare loss from a tariff, distortion of comparative advantage, and the serious risk of retaliation and trade wars that shrink world trade.
Trading blocs and the WTO
A trading bloc is a group of countries that agree to reduce or remove trade barriers between members, ranging from a free-trade area (no internal tariffs) to a customs union (a common external tariff) to a single market (free movement of factors). Blocs create trade (cheaper goods from efficient members) but can also divert trade away from more efficient non-members, which can reduce welfare. The World Trade Organization (WTO) promotes and enforces freer global trade through negotiated rounds and settles disputes between members.
Exam-style practice questions
Practice questions written in the style of AQA exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.
AQA 20186 marksTwo countries each have 100 units of resource. Country X can produce 10 wheat or 20 cloth per unit; Country Y can produce 8 wheat or 8 cloth per unit. Identify each country's comparative advantage and explain the basis for trade.Show worked answer →
A 6 mark question rewards opportunity-cost ratios and the correct specialisation.
- Country X opportunity costs
- 1 wheat costs 2 cloth; 1 cloth costs 0.5 wheat.
- Country Y opportunity costs
- 1 wheat costs 1 cloth; 1 cloth costs 1 wheat.
- Comparative advantage
- X gives up less wheat per cloth (0.5 versus 1), so X has the comparative advantage in cloth. Y gives up less cloth per wheat (1 versus 2), so Y has the comparative advantage in wheat.
- Trade
- X specialises in cloth, Y in wheat, and they trade, raising total output. Markers reward correct opportunity-cost ratios and matching each country to its lower-opportunity-cost good.
AQA 20219 marksUsing a diagram, assess the effects of imposing a tariff on imported steel.Show worked answer →
A 9 mark assessment question needs a tariff diagram and a judgement.
- Diagram and effects
- A tariff raises the import price, so domestic supply extends, domestic demand contracts, imports fall, the government gains tariff revenue, and there are two deadweight welfare loss triangles (production and consumption inefficiency).
- Winners and losers
- Domestic steel producers and the government gain; consumers and downstream users (carmakers) lose from higher prices.
- Evaluation
- Protection may safeguard jobs and infant or strategic industries, but it raises costs, risks retaliation and trade wars, and shelters inefficiency. Judgement: net welfare usually falls, so tariffs are justified only in specific cases. Markers reward the diagram, winners and losers, and a supported stance.
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Sources & how we know this
- AQA A-level Economics (7136) specification — AQA (2015)