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FISCAL POLICY

What does trade theory say about the impact of Brexit?

While economic theory suggests higher barriers to trade between the UK and EU will be harmful, some argue there will be benefits too. To evaluate this, it is important to understand why trade is supposed to make people better off, but also why this might not be the case. Here, Alex Davenport sets out the simple case in favour of free trade, explores how this relates to Brexit, and looks at some opposing arguments too

You can find answers to the questions in this article at www.hoddereducation.co.uk/economicreviewextras

Free trade is generally thought to make people better off. To understand why this is, imagine a world with just two islands — Cadbury and Jaffa. These islands have one citizen each, who needs to eat both chocolate and biscuits to survive. The resident of Cadbury can make eight chocolates and four biscuits by spending half of their time on each, whereas the resident of Jaffa can only make two chocolates and three biscuits. Cadbury is therefore better at producing both chocolates and biscuits than Jaffa. If the two islands do not trade, both make chocolates and biscuits, and consume what they produce.

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Horizontal mergers and vertical integration

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Why do World Bank projects sometimes fail?

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