Economic liberalization refers to a country “opening up” to the rest of the world with regards to trade, regulations, taxation, and other areas that generally affect business in the country. 1

Liberalization, the loosening of government controls. Although sometimes associated with the relaxation of laws relating to social matters such as abortion and divorce, liberalization is most often used as an economic term. In particular, it refers to reductions in restrictions on international trade and capital.

Advantages of Trade Liberalisation

• Lower prices. The removal of tariff barriers can lead to lower prices for consumers.
• Increased competition. Trade liberalisation means firms will face greater competition from abroad.
• Economies of scale. Trade liberalisation enables greater specialisation.
• Inward investment.
• More advantages of free trade.

Freeing trade frequently benefits the poor especially. Moreover, developing countries would gain more from global trade liberalization as a percentage of their GDP than industrial countries, because their economies are more highly protected and because they face higher barriers.

Trade liberalization removes or reduces barriers to trade among countries, such as tariffs and quotas. Having fewer barriers to trade reduces the cost of goods sold in importing countries. Trade liberalization can benefit stronger economies but put weaker ones at a greater disadvantage.

Trade is central to ending global poverty. Countries that are open to international trade tend to grow faster, innovate, improve productivity and provide higher income and more opportunities to their people. Open trade also benefits lower-income households by offering consumers more affordable goods and services.

Trade has been a part of economic development for centuries. It has the potential to be a significant force for reducing global poverty by spurring economic growth, creating jobs, reducing prices, increasing the variety of goods for consumers, and helping countries acquire new technologies.

A trade surplus allows a country’s economy to grow, while a trade deficit makes a country poorer. Increasing trade and reducing their balance of trade deficit is essential for the development of a country. For example, many developing countries are dependent on developed countries for manufactured goods or aid .

Trade and Wages. Even if trade does not reduce the number of jobs, it could affect wages. Because trade raises the amount that an economy can produce by letting firms and workers play to their comparative advantage, trade will also cause the average level of wages in an economy to rise.

In a relatively skill-abundant country, international trade increases the relative price of the skill-intensive products. This reduces the unemployment rate of skilled workers and increases the unemployment rate of unskilled workers.

Cheesers’ wages could be higher since wine workers cannot shift to the cheese industry to take advantage of the higher wage. When the countries move from autarky to free trade, the price ratio in the US, , rises. The result is a redistribution of income as shown in the Table.

In brief, the World Trade Organization (WTO) is the only international organization dealing with the global rules of trade. Its main function is to ensure that trade flows as smoothly, predictably and freely as possible.

Some common features of trade agreements are (1) reciprocity, (2) a most-favoured-nation (MFN) clause, and (3) national treatment of nontariff barriers. Reciprocity is a necessary feature of any agreement. If each required party does not gain by the agreement as a whole, there is no incentive to agree to it.

[C] Higher exports will decrease real wages because the price level will increase but nominal wages will not vary siginificantly.

Rising exports will help increase AD and cause higher economic growth. Growth in exports can also have a knock on effect to related ‘service industries. ‘ For example, the success of car exports in Sunderland will help the local economy with local clubs and shops benefiting from increased spending.

Nominal wage, or money wage, is the literal amount of money you get paid per hour or by salary.

The long run aggregate supply curve (LRAS) is determined by all factors of production – size of the workforce, size of capital stock, levels of education and labour productivity. If there was an increase in investment or growth in the size of the labour force this would shift the LRAS curve to the right.

Along with energy prices, two other key inputs that may shift the SRAS curve are the cost of labor, or wages, and the cost of imported goods that we use as inputs for other products. Note that, unlike changes in productivity, changes in input prices do not generally cause LRAS to shift, only SRAS.

long-run aggregate supply (LRAS) a curve that shows the relationship between price level and real GDP that would be supplied if all prices, including nominal wages, were fully flexible; price can change along the LRAS, but output cannot because that output reflects the full employment output.

Positive economic growth results from an increase in productive resources, such as labor and capital. Positive economic growth is therefore represented by a shift to the right of the LAS curve. Similarly, negative economic growth decreases the natural level of real GDP, causing the LAS curve to shift to the left.

The aggregate supply curve shifts to the left as the price of key inputs rises, making a combination of lower output, higher unemployment, and higher inflation possible. When an economy experiences stagnant growth and high inflation at the same time it is referred to as stagflation.

LRAS can shift if the economy’s productivity changes, either through an increase in the quantity of scarce resources, such as inward migration or organic population growth, or improvements in the quality of resources, such as through better education and training.

A shift in aggregate supply can be attributed to many variables, including changes in the size and quality of labor, technological innovations, an increase in wages, an increase in production costs, changes in producer taxes, and subsidies and changes in inflation.

The aggregate demand curve, or AD curve, shifts to the right as the components of aggregate demand—consumption spending, investment spending, government spending, and spending on exports minus imports—rise. The AD curve will shift back to the left as these components fall.

Main components of aggregate supply are two, namely, consumption and saving. A major portion of income is spent on consumption of goods and services and the balance is saved. Thus, national income (Y) or aggregate supply (AS) is sum of consumption expenditure (C) and savings (S).