The Case for Free Trade Additional gains from Free Trade Protected markets in small countries do not allow firms to exploit scale economies Example: In the auto industry an efficient scale assembly should make a minimum of 80,000 cars per year In Argentina, 13 firms produced a total of 166,000 cars per year The presence of scale economies favors free trade that generates more varieties and results in lower prices Free trade, as opposed to "managed trade, provides a wider range of opportunities and thus a wider scope for nnovation Copyright C 2003 Pearson Education, Inc Slide 9-8Copyright © 2003 Pearson Education, Inc. Slide 9-8 ▪ Additional Gains from Free Trade • Protected markets in small countries do not allow firms to exploit scale economies. – Example: In the auto industry, an efficient scale assembly should make a minimum of 80,000 cars per year. – In Argentina, 13 firms produced a total of 166,000 cars per year. • The presence of scale economies favors free trade that generates more varieties and results in lower prices. • Free trade, as opposed to “managed” trade, provides a wider range of opportunities and thus a wider scope for innovation. The Case for Free Trade