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International Trade, Globalisation and Exchange Rates: Question 6

Syllabus 6.1

Multiple choice 1 mark

Rasenda and Tolmira used to produce almost all their own goods domestically, with very little trade between them. The two countries then remove all barriers to trade with each other, and each begins to specialise in the goods it can produce most efficiently.

Which of the following is most likely to be a genuine benefit that consumers in Rasenda gain as a direct result of this move towards specialisation and free trade?

Choose an answer to check it, then compare with the worked solution below.
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Worked solution

Step 1: Recall what specialisation and free trade change for consumers

When trade barriers are removed and countries specialise, each country concentrates its resources on the good(s) it can produce most efficiently, then trades for the rest. For consumers this generally means access to goods that would be expensive or impossible to produce domestically, more competition between domestic and foreign producers (which tends to push prices down and quality up), and a wider range of choice than a country trying to produce everything itself could offer.

Step 2: Test each option against this

  • A: Removing trade barriers reduces or eliminates tariffs, so government tariff revenue is likely to fall, not rise. This is the opposite of what free trade does.
  • B: Free trade exposes domestic firms to more competition from imports, not less. Reduced competition is a feature of protectionism (for example, a tariff or quota that shields domestic firms), not of free trade.
  • C: This matches the general effect of specialisation and free trade on consumers. Access to goods produced wherever they are made most efficiently, prices pushed down by increased competition, and a wider range of choice than domestic-only production could offer.
  • D: Specialisation means Rasenda produces less of the goods it is relatively inefficient at making, relying on imports for them instead. This increases, rather than reduces, Rasenda’s dependence on imports.

Step 3: Select the correct option

Only option C describes an outcome that follows directly, and positively, from specialisation and free trade for consumers. The answer is option C\boxed{\text{option C}}.

Final answer

  • Consumers in Rasenda are most likely to gain a wider range of goods, often at lower prices, option C.