The North American Free Trade Agreement
Essay by yiyiyiyiyyi • October 10, 2016 • Study Guide • 333 Words (2 Pages) • 1,436 Views
1. Free trade is a policy followed by international markets that goods and services can be exchanged freely between nations, without barriers that could hinder the trade process.
Example: The North American Free Trade Agreement which is an agreement signed by Canada, Mexico, and the United States, creating a trilateral trade bloc in North Americaon January 1, 1994.
The objective of NAFTA was to trade and investment between the U.S, Canada and Mexico, eliminating barriers (Within 10 years of the implementation of the agreement, all U.S.-Mexico tariffs would be eliminated apart from some U.S. agricultural exports to Mexico that were to be phased out within 15 years, the majority of U.S.-Canada trade was already duty-free). NAFTA also sought to eliminate non-tariff trade barriers in order to protect the intellectual property rights on traded products.
2. Absolute advantage refers to ability of a country to produce a certain product more efficiently than another country.
Comparative advantage refers to ability of a country to produce a particular product with a lower opportunity cost than another country.
Example:
Country | Food production | Clothes production |
China | 100 | 100 |
Canada | 400 | 200 |
The chart illustrates that how much the two countries can produce of these two goods using only one hour of labor to produce.
It is manifest that Canada has an absolute advantage over China in the production of food and clothing, as Canada is more efficient at producing both products.
When it comes to the opportunity costs, we can see from the chart that Chinese opportunity cost of producing 1 ton of food is one 1 of clothes and vice-versa. Canadian opportunity cost of producing 1 ton of food is 0.5 ton of clothes, in the meantime, the opportunity cost of 1 ton of clothes is 2 tons of food. Thus, Canada has a comparative advantage in food production, as its lower opportunity cost of food production with respect to China. Similarly, China has a comparative advantage over Canada in the production of clothes, as its lower opportunity cost of clothes production with respect to Canada.
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