Cambridge IGCSE Economics 0455 – International Trade and Globalisation: Specialisation and Free Trade
International Trade and Globalisation – Specialisation and Free Trade
Objective
To understand the advantages and disadvantages of free trade and to be able to evaluate its impact on an economy.
What is Free Trade?
Free trade is a policy that allows countries to exchange goods and services without the imposition of tariffs, quotas, subsidies or other restrictions. It is based on the principle that each country should specialise in the production of goods for which it has a comparative advantage.
Key Economic Theory – Comparative Advantage
The theory of comparative advantage explains why free trade can increase overall welfare. A country has a comparative advantage in producing a good if it can produce it at a lower opportunity cost than another country.
Opportunity cost example:
\$\text{Opportunity Cost of 1 unit of Good A} = \frac{\text{Units of Good B given up}}{\text{Units of Good A produced}}\$
Advantages of Free Trade
Increased Efficiency and Specialisation – Resources are allocated to their most productive uses, leading to higher total output.
Lower Prices for Consumers – Competition and the removal of tariffs reduce the cost of imported goods.
Greater \cdot ariety of Goods – Consumers have access to a wider range of products that may not be produced domestically.
Economies of Scale – Firms can expand production for larger markets, reducing average costs.
Stimulus for Innovation – Exposure to international competition encourages firms to improve technology and processes.
Improved International Relations – Trade interdependence can foster diplomatic cooperation.
Disadvantages of Free Trade
Domestic Industry Decline – Industries that cannot compete with cheaper imports may shrink or disappear, leading to job losses.
Dependence on Foreign Supply – Over‑reliance on imports can make an economy vulnerable to external shocks (e.g., political instability, price spikes).
Unequal Distribution of Gains – Benefits may accrue mainly to consumers and owners of capital, while low‑skill workers may suffer.
Environmental Concerns – Increased production and transport can raise carbon emissions and resource depletion.
Loss of Cultural Identity – Influx of foreign goods and services may erode local traditions and businesses.
Comparison of Advantages and Disadvantages
Aspect
Advantages
Disadvantages
Economic Efficiency
Resources allocated to most productive uses; higher total output.
Domestic firms that are less efficient may be forced out.
Consumer Welfare
Lower prices and greater variety.
Potential loss of local products and cultural heritage.
Employment
Job creation in export‑oriented sectors.
Job losses in import‑competing industries.
Innovation
Stimulates technological advancement.
Rapid change may outpace the ability of some workers to adapt.
External Risks
Access to a wider range of inputs and markets.
Vulnerability to global price fluctuations and supply disruptions.
Suggested Diagram
Suggested diagram: Production Possibility Frontiers (PPFs) of two countries showing comparative advantage and the gains from trade after specialization.
Evaluation Checklist for Exam Answers
Define free trade and comparative advantage.
Explain how specialisation leads to efficiency.
List at least three advantages and three disadvantages.
Use a diagram (PPF or trade flow) to illustrate gains from trade.
Provide real‑world examples (e.g., UK‑EU trade, China’s export‑led growth).
Weigh the short‑term versus long‑term impacts on different groups (consumers, workers, firms, government).
Conclude with a balanced judgement based on the evidence presented.