Question

Which of the following statements is true? Free trade causes contraction of the export-oriented sector. Free trade causes contraction in the import-competing sector. Free trade restricts consumption choices of the domestic consumers. All the domestic producers benefit when a country engages in free trade.

Answer 1

The correct answer is: Free trade causes contraction in the import-competing sector.

Step-by-step explanation:

Free trade implies no or very low restrictions on trade between countries. These restrictions may be tariffs, quotas, permits, licenses, etc.

Free trade means that foreign producers will be able to sell their products in the domestic market easily. So it will increase competition in the sector that is competing with foreign producers. Or in other words, we can say that it will lead to a contraction in the import-competing sector.

This happens because domestic producers have to face competition from foreign producers. We are aware that a country exports the good it specializes in producing. So obviously foreign producers specialize in that product. This will lead to a contraction in the domestic market for the good.