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International Free Trade

International Free Trade

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Published by aryans46

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Published by: aryans46 on Feb 27, 2010
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09/23/2010

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 ECONOMICS
International Free TradeIntroduction and Analysis
Case studySubmitted by
Ajay Sharma(07co01)Amlan Barman(07co03)
 
Kirti Kumar(07co28)
 
Introduction-:
Free trade
is a type of trade policy that allows traders to act and transactwithout interference from government. According to the law of comparative advantagethe policy permits trading partners mutual gains from trade of goods and services.Under a free trade policy, prices are a reflection of true supply and demand, and are thesole determinant of resource allocation. Free trade differs from other forms of tradepolicy where the allocation of goods and services amongst trading countries aredetermined by artificial prices that do not reflect the true nature of supply and demand.These artificial prices are the result of protectionist trade policies, whereby governmentsintervene in the market through price adjustments and supply restrictions. Suchgovernment interventions generally increase the cost of goods and services to bothconsumers and producers.Cumulation is the relationship between different FTAs regarding the rules of origin —sometimes different FTAs supplement each other, in other cases there is no cross-cumulation between the FTAs. A free trade area is a result of a free trade agreement (aform of trade pact) between two or more countries. Free trade areas and agreements(FTAs) are cascadable to some degree — if some countries sign agreement to formfree trade area and choose to negotiate together (either as a trade bloc or as a forum of individual members of their FTA) another free trade agreement with some externalcountry (or countries) — then the new FTA will consist of the old FTA plus the newcountry (or countries).The aim of a free trade area is to so reduce barriers to easy exchange that trade cangrow as a result of specialisation, division of labor, and most importantly via (the theoryand practice of) comparative advantage. The theory of comparative advantage arguesthat in an unrestricted marketplace (in equilibrium) each source of production will tend tospecialize in that activity where it has comparative (rather than absolute) advantage.The theory argues that the net result will be an increase in income and ultimately wealthand well-being for everyone in the free trade area. However the theory refers only toaggregate wealth and says nothing about the distribution of wealth. In fact there may besignificant losers, in particular among the recently protected industries with acomparative disadvantage. The proponent of free trade can, however, retort that thegains of the gainers exceed the losses of the losers.Our study revolves around the implications of a free trade economy and its feasibility inthe current economic scenario.Features of free trade1) Trade of goods without taxes by means of special quotas or removal of restrictions.2) Removal of restrictions on trade limitations.
 
3) Free access to markets4) Free flow of capital and5) Free flow of labor.1) Trade of goods without taxes by means of special quotas or removal of restrictions.The trade of goods in a free trade area is achieved by the means of certain rules inconsensus on certain agreements. These rules are agreed upon by the respectivegovernments and adhered to by the same. The free trade allows the trade of goods inthe respective regions. Nations in these regions mostly share a common currency. Thisallows the nations to transact in terms of freedom from rules of national difference indenominations.2)Removal of restrictions on trade limitations.Countries usually have a fixed state control on the inflow and outflow of trade andrestrict it in terms of the amount of total capital flow. Thus the government forms theregulatory body to regulate and stabilize the economy and sees to it that the regulationsare strictly followed. In a free trade, governments have a form of mutual understandingover the unrestricted flow of capital and goods. Thus the governments act as an initiator of free customs and other duties which limits the trade. These countries either have thesame economic pattern (As in members of European Union) or have a dependency of markets (As Nepal and India).3) Free access to marketsCountries of these zones have free access to one another’s markets which allows themto trade freely in terms of exports and imports. The regulations of custom imports arerelaxed which them to invest in each other’s markets freely without any binding. Alsothese countries share the knowledge and information regarding each other’s marketconditions which help in demand forecasting before investment. Also these helps toavoid future losses suffered due to insufficient knowledge of the market.4) Free flow of capitalCountries of the free trade zones usually trade through a common currency. Thisallows them to trade freely in terms of capital in spite of the different economic states of the country. Even though usually these countries share a common economic status( Example : Members of the European Union.), certain free trade zones (like Nepal and

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