1.1. What do you expect to see happen to average prices after trade opens up? In the text we described the way in which free trade allows countries to make the most of what they do well. Recent work in the trade area has also described the way in which free trade improves the productivity of firms within a country.1 Within a country we typically see firms of varying productivity.

If firms were in fact all producing exactly the same product, we would expect higher-cost firms to be driven out of business. In fact, firms are often producing products that are close substitutes, but not identical. Matchbox cars are like Hot Wheels cars but not identical. Under these conditions, industries will have firms with a range of productivity levels because some people will pay a little more for the particular product a firm supplies.