Free Trade

AAA

DEFINITION of 'Free Trade'

The unrestricted purchase and sale of goods and services between countries without the imposition of constraints such as tariffs, duties and quotas. Free trade is a win-win proposition because it enables nations to focus on their core competitive advantage(s), thereby maximizing economic output and fostering income growth for their citizens.

INVESTOPEDIA EXPLAINS 'Free Trade'

Formerly insular economies such as China and India have expanded at much faster growth rates since they adopted free trade principles in the 1980s and 1990s, respectively.


Free trade enables nations to concentrate their efforts on manufacturing products or providing services where they have a distinct comparative advantage, according to the theory first espoused by economist David Ricardo two centuries ago. A free trade policy should enable a nation to generate enough foreign currency to purchase the products or services that it does not produce indigenously. The process works best when there are few if any barriers to entry for such imports. The imposition of artificial constraints such as tariffs on imports or the provision of subsidies to exports will introduce distortions and impede free trade.

RELATED TERMS
  1. North American Free Trade Agreement ...

    A regulation implemented on Jan. 1, 1994, that decreased and ...
  2. Free Trade Area

    A group of countries that invoke little or no price control in ...
  3. Tariff

    A tax imposed on imported goods and services. Tariffs are used ...
  4. Dumping

    In international trade, the export by a country or company of ...
  5. Quota

    A government-imposed trade restriction that limits the number, ...
  6. Protectionism

    Government actions and policies that restrict or restrain international ...
RELATED FAQS
  1. What are the implications of comparative advantage as it relates to international ...

    Comparative advantage was popularized by the 19th century economist David Ricardo. Countries can collectively benefit from ... Read Full Answer >>
  2. What are some causes of structural unemployment?

    Structural unemployment is a form of unemployment caused by shifts in the economy. It occurs when there is an oversupply ... Read Full Answer >>
  3. How can companies reduce internal and external business risk?

    A company can reduce negative exposure to business risk by identifying internal risks and external risks. Internal risks ... Read Full Answer >>
  4. How can I use value chain analysis to evaluate investment decisions?

    It is possible for an investor to use value chain analysis to evaluate an investment decision since analysis of a company's ... Read Full Answer >>
  5. What are the primary activities of Michael Porter's value chain?

    The primary activities of Michael Porter's value chain are inbound logistics, operations, outbound logistics, marketing and ... Read Full Answer >>
  6. How do you calculate the marginal propensity to consume?

    The standard formula for calculating the marginal propensity to consume, or MPC, is marginal consumption divided by marginal ... Read Full Answer >>
Related Articles
  1. Economics

    Adam Smith: The Father Of Economics

    This free thinker promoted free trade at a time when governments controlled most commercial interests.
  2. Personal Finance

    What Is International Trade?

    Everyone's talking about globalization, so we explain what is it and why some oppose it.
  3. Economics

    Globalization: Progress Or Profiteering?

    Proponents of globalization argue that it helps the economies of developing nations and makes goods cheaper, while critics say that globalization reduces domestic jobs and exploits foreign workers. ...
  4. Personal Finance

    Antitrust Defined

    Check out the history and reasons behind antitrust laws, as well as the arguments over them.
  5. Economics

    What Is The World Trade Organization?

    The WTO sets the global rules of trade. But what exactly does it do and why do so many oppose it?
  6. Economics

    NAFTA's Winners And Losers

    Read on to find out who this free-trade agreement helped, and who it hurt.
  7. Economics

    Explaining Marginal Propensity to Consume

    The marginal propensity to consume is a measure of how much consumption changes when income changes.
  8. Economics

    Explaining the Value Chain

    A model of how businesses receive raw materials as input, add value to the raw materials, and sell finished products to customers.
  9. Fundamental Analysis

    Explaining Variance

    Variance is a measurement of the spread between numbers in a data set.
  10. Economics

    What is Productivity?

    Productivity is an economic term describing the relationship between outputs as compared to inputs needed to produce those outputs.

You May Also Like

Hot Definitions
  1. Capital Stock

    The common and preferred stock a company is authorized to issue, according to their corporate charter. Capital stock represents ...
  2. Unearned Revenue

    When an individual or company receives money for a service or product that has yet to be fulfilled. Unearned revenue can ...
  3. Trailing Twelve Months - TTM

    The timeframe of the past 12 months used for reporting financial figures. A company's trailing 12 months is a representation ...
  4. Subordinated Debt

    A loan (or security) that ranks below other loans (or securities) with regard to claims on assets or earnings. Also known ...
  5. International Financial Reporting Standards - IFRS

    A set of international accounting standards stating how particular types of transactions and other events should be reported ...
  6. Geometric Mean

    The average of a set of products, the calculation of which is commonly used to determine the performance results of an investment ...
Trading Center