Understanding the Proposed Benefits of Free Trade
Economic models[edit]
For more details on this topic, see 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.[1][2]
Currently, the World Bank believes that, at most, rates of 20% can be allowed by developing nations[citation needed]; but Ha-Joon Chang believes higher levels may be justified because the productivity gap between developing and developed nations is much higher than the productivity gap which industrial countries faced. (A general feature is that the underdeveloped nations of today are not in the same position that the developed nations were in when they had a similar level of technology, because they are weak players in a competitive system; the developed nations have always been strong players, although formerly at an overall lower level.[3]
Counter arguments to this point of view are that the developing countries are able to adopt technologies from abroad, whereas developed nations had to create new technologies themselves, and that developing countries have far richer markets to which to export than was the case in the 19th century.) If the main defense tariffs is to stimulate infant industries, a tariff must be high enough to allow domestic manufactured goods to compete for the tariff to be successful. This theory, known as import substitution industrialization, is largely considered ineffective for currently developing nations.[3]
Disadvantages of tariffs[edit]
The pink regions are the net loss to society caused by the existence of the tariff.
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
For more details on this topic, see 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.[1][2]
Currently, the World Bank believes that, at most, rates of 20% can be allowed by developing nations[citation needed]; but Ha-Joon Chang believes higher levels may be justified because the productivity gap between developing and developed nations is much higher than the productivity gap which industrial countries faced. (A general feature is that the underdeveloped nations of today are not in the same position that the developed nations were in when they had a similar level of technology, because they are weak players in a competitive system; the developed nations have always been strong players, although formerly at an overall lower level.[3]
Counter arguments to this point of view are that the developing countries are able to adopt technologies from abroad, whereas developed nations had to create new technologies themselves, and that developing countries have far richer markets to which to export than was the case in the 19th century.) If the main defense tariffs is to stimulate infant industries, a tariff must be high enough to allow domestic manufactured goods to compete for the tariff to be successful. This theory, known as import substitution industrialization, is largely considered ineffective for currently developing nations.[3]
Disadvantages of tariffs[edit]
The pink regions are the net loss to society caused by the existence of the tariff.
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