Asset Allocation Asset allocation refers to the division of one's investment portfolio across the various asset classes. At the highest level, this refers to a split between stocks and bonds.
Supply and demand Two simple ways to understand the proposed benefits of free trade are through David Ricardo's theory of comparative advantage and by analyzing the impact of a tariff or import quota.
An economic analysis using the law of supply and demand and the economic effects of a tax can be used to show the theoretical benefits and disadvantages of free trade. Underdeveloped nations today, Chang believes, are weak players in a much more competitive system.
If the chief justification for a tariff is to stimulate infant industries, it must be high enough to allow domestic manufactured goods to compete with imported goods in order to be successful.
This theory, known as import substitution industrializationis largely considered ineffective for currently developing nations. The chart at the right analyzes the effect of the imposition of an import tariff on some imaginary good.
Prior to the tariff, the price of the good in the world market and hence in the domestic market is Pworld. The tariff increases the domestic price to Ptariff.
Consumers are made worse off because the consumer surplus green region becomes smaller. Producers are better off because the producer surplus yellow region is made larger.
The government also has additional tax revenue blue region. However, the loss to consumers is greater than the gains by producers and the government. The magnitude of this societal loss is shown by the two pink triangles. Removing the tariff and having free trade would be a net gain for society.
From that country's perspective, the tariff leaves producers worse off and consumers better off, but the net loss to producers is larger than the benefit to consumers there is no tax revenue in this case because the country being analyzed is not collecting the tariff. Under similar analysis, export tariffs, import quotas, and export quotas all yield nearly identical results.
Free trade creates winners and losers, but theory and empirical evidence show that the size of the winnings from free trade are larger than the losses. It is economically efficient for a good to be produced by the country which is the lowest cost producer, but this does not always take place if a high cost producer has a free trade agreement while the low cost producer faces a high tariff.
Applying free trade to the high cost producer and not the low cost producer as well can lead to trade diversion and a net economic loss. This is why many economists place such high importance on negotiations for global tariff reductions, such as the Doha Round. Though it creates winners and losers, the broad consensus among economists is that free trade is a large and unambiguous net gain for society.
Gregory Mankiw"Few propositions command as much consensus among professional economists as that open world trade increases economic growth and raises living standards.U.S. Bureau of Labor Statistics | Local Area Unemployment Statistics Information and Analysis, PSB Suite , 2 Massachusetts Avenue, NE Washington, DC The Bureau of Labor Statistics is the principal fact-finding agency for the Federal Government in the broad field of labor economics and statistics.
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