Which of the following is true about the welfare implicatio

) Which of the following is true about the welfare implications of a Free Trading Agreement? (a) It always increases welfare. (b) It always reduces welfare. (c) The welfare implications are ambiguous.

Solution

Correct Answer:

A

Due to free trade agreement, consumer surplus increases, even if there is a decrease in producer surplus. Besides, new jobs are created, migration of people towards the new opportunities, takes place and factor income from abroad is also received. It overall increases the size of welfare.