REVISION

1. Analyse the benefits and disadvantages to host countries of

multinationals.
2. Explain how we measure the size of multinational companies.

FREE TRADE
Free Trade is trading without hindrance in the form of barriers such as
import tariffs. (Trading goods without extra charges/payments)

Free trade enables countries to specialize in what they do most

efficiently and then trade with others to buy – at less cost than
manufacturing itself – what other countries produce. (**Key
Question**)

COMPARATIVE ADVANTAGES
Comparative advantage is an economy's ability to produce a particular
good or service at a lower opportunity cost than its trading partners.
A comparative advantage gives a company the ability to sell goods and
services at a lower price than its competitors and realize stronger
sales margins.

EXAMPLE:
Pakistan and Bangladesh are both very efficient textile producers. This
is because they have access to the raw materials such as silk, cotton
and wool. They also have highly skilled labour and many factories
equipped with modern machinery. It therefore makes sense for these
countries to produce textiles.

BENEFITS OF FREE TRADE

 Free trade enables people to sell their products to those who are
willing to pay the highest price for them.
 Free trade increases the amount of products that are available.
 Higher quality of products.
 Free trade enhances the spread of new ideas, lifestyles and
products.
 Job opportunities.
WHO IS THE WORLD TRADE ORGANIZATION? (WTO)
The WTO was set up in 1995.

Main purpose:

 Pursue open border – free trade

 The most favored nation principle: if a country reduces tariffs to
another country it will do so to all other members of the WTO.

Main activities:

 Negotiating reduction or elimination of import tariffs

 Eliminating barriers to entry
 Agreeing rules on the conduct of trade (dumping & waste)

KEY WORD TO REMEMBER: TRADE BLOC

There are a number of trade blocs, regional groupings of countries that
have preferential trade agreements between member countries.

FREE TRADE AREAS (Trade Blocs)

 NAFTA – North American Free Trade Area (US, Canada &

Mexico)
 Asia-Pacific Cooperation, consisting of over 20 countries (Includes
US, Japan, Russia and China)
 Association of South East Asian Nations (ASEAN)
 South America Free Trade Area (SAFTA)
 European Union (EU)

CLASS QUESTIONS

1. Describe the importance of the World Trade Organization.

2. Japan can produce 4 laptops or 12 phones; Brazil can produce 1
laptop or 5 phones.

Who has comparative advantage for laptops and phones?