Evaluate one reason why trade may be beneficial for an economy (5 marks)

Trade is the international exchange of goods and services. An economy can engage in trade because of the variation of production efficiency between countries, it is able to export goods it produces at a relatively lower opportunity cost and import goods that other economies produce at lower cost than its own. One benefit associated with greater trade is that it leads to greater employment in the domestic economy. In an open economy producers have a greater demand for the goods they produce; not only are domestic consumers purchasing goods, but so are international consumers. This means that more workers are needed to produce the higher output, and employment will rise. Higher employment creates further benefits for an economy. The government has to spend less money on transfer payments such as unemployment benefits, leading to a either a fall in government debt or an increase in productive public sector investment. The resulting impact on the total economy is greater output through an increased aggregate demand creating higher standards of living for consumers. However, the opposite could be true given an economy has low productivity and has to rely on imports for cheaper goods. Workers in the domestic economy will become displaced as demand for what they produce has been transferred abroad, and as a result face unemployment. If the net impact of trade is that more goods are imported than exported, then in general more workers will be unemployed than employed.