Which of the following best describes the primary benefit of a free trade agreement?

• A. Allow countries to specialize in the production of goods in which they have a comparative advantage
• B. Guarantee equal distribution of income among trading partners
• C. Prevent negative externalities from occurring in international markets
• D. Eliminate all forms of government intervention in the economy

Answer: (A)

Verified step by step guidance

1. Understand the concept of a free trade agreement (FTA): it is a pact between two or more countries to reduce or eliminate barriers to trade, such as tariffs and quotas, to facilitate the flow of goods and services.
2. Recall the principle of comparative advantage, which states that countries benefit by specializing in producing goods for which they have a lower opportunity cost compared to other countries.
3. Recognize that the primary benefit of an FTA is to enable countries to specialize according to their comparative advantage, thereby increasing overall efficiency and gains from trade.
4. Evaluate the other options: equal income distribution is not guaranteed by FTAs, negative externalities are not necessarily prevented by FTAs, and government intervention may still exist despite FTAs.
5. Conclude that the best description of the primary benefit of a free trade agreement is that it allows countries to specialize in the production of goods in which they have a comparative advantage.