Two benefits that can arise from international trade.

Production Gains:

Trade is a voluntary exchange where two parties have to benefit. Specialization is when tasks are allocated according to what each country does best. Each country is gifted with certain factors of productions, which others are not. The endowments, such as land, labour and capital are different for each country. Because they are differently endowed, there will be different cost ratios in the use of the FOP’s. For example, the more labourers, the cheaper the labour costs. Countries will produce and export goods which they are well endowed with, because the good can be produced relatively cheaply using plentiful resources.

Because the countries can trade the goods, each country can gain and consume more than that which would be possible if the countries did not export and import. Trade benefits producers because they gain a larger market, and consumers, because they gain a larger range of goods to chose from. It would be impossible for a country to produce all the goods wanted in the country using only domestic resources.

An economy that focuses on a relatively narrow range of goods will most likely experience increased productivity because of experience, or improvement in technology.

Therefore the costs of production may decrease. This can be seen in Japan. Because Japan has concentrated so intensively on the automobile market, the cost of production per car has decreased through time.

Political Benefits:

“When you’re promoting business, You’re promoting peace. Because when I understand your aims and your culture, I don’t have any reason to declare war on you, and instead we work together. If we’re doing business together, we’re not going to fight each other because if I owe you money, you’re not going to shoot me. –Guy Tozzoli.

Trading with people of different cultures, norms and tradition may lead to understanding and acceptance, as well as interdependence between the two countries.

For example, one of the main reasons why the European Union was formed was so that trade creates an disincentive for conflict. Another example would be the improving relationship between China and the US, because the two countries had become interdependent increasingly over the past ten years.

1 comment September 27, 2009

Japan shifts from the Liberal Democratic Party to the Democratic Party

The political power in Japan shifted from the Liberal Democratic Party, which had ruled Japan for the majority of time since World War Two, to the Democratic Party.

The defeat of the Liberal Democratic Party of Japan was most likely triggered by the current economic crisis that Japan is suffering from. The recession had perhaps reminded the Japanese people of the hardships experienced in the previous economic collapse in the early 1990’s. The action the Japanese people are taking towards the current crisis is similar to what had happened in 1993, when the political power shifted to the Democratic Party for 11 months.

Additionally, the shift in political power is an indication of the Japanese people’s frustration towards current state, because they seem to blame it on the Liberal Party. They had felt no change or benefit from the policies that was implemented by the previous Prime Minister, Taro Aso, and therefore, demanded for more change, by voting for another party.

However, how long will the new government last? In 1993, the party was not able to maintain unity within the group, and therefore fell apart after a mere 11 months. The Democratic Party is know for having radically different opinions internally. Will the party last longer this time? Additionally, many Japanese analysts say that the Democratic Party was voted because people wanted to vote for something different, and not because they particularly liked the party. In this sense, once people again, begin to feel frustration towards the lack of improvement in the economy, they may not remain loyal towards the party, and switch quickly back to the Liberal Democratic Party.

Resources:

http://www.nytimes.com/2009/08/31/world/asia/31japan.html?pagewanted=1&_r=1

http://news.bbc.co.uk/2/hi/asia-pacific/8229744.stm

http://www.yomiuri.co.jp/dy/national/20090831dy02.htm

2 comments September 22, 2009

What is surprising about taxation

Sales taxes can be a form of regressive taxation.

Usually, when we look at sales taxes, we think that they are proportional, because the tax is set, and does not change, based on the consumer of the good. However, depending on the income of the consumer, the proportion the tax is, in comparison to their income changes. To a consumer with a smaller income, the tax for a specific good will be relatively large, in comparison to a person with a larger income. The same tax makes up a smaller part of the income, and so the tax is not as big of a burden as it is for people with less income. The nominal tax is not the same as an effective tax.

With this in mind, which taxation system is best?

I still think that the progressive tax system is best. With sales taxes, it looks like the burden is placed heavily on people with lower incomes, but based on information from the Tax Foundation in the United States, in 1997, the top 1% of taxpayers paid 33.2% of the total income tax. Therefore despite sales taxes being a burden for people with smaller income, all in all, I think that the progressive tax system is still the best.

Add a comment August 30, 2009

Which tax system is best?

Proportional-

The tax rate is fixed. Proportional taxation is a system where a  fixed percentage of income is paid. The percentage paid remains the same for both higher and lower incomes. A rise in income will add to total tax payment at a constant rate, and so the average tax rate remains the same. This system burdens everyone in the same way, and ensures that there is equality in the sacrifices individuals make for the society. With this system however, the government probably cannot collect as much tax as a progressive system, unless the set proportion is relatively high. Therefore, the government might not be able to support public systems as efficiently as in a progressive system.

Progressive-

The tax rate increases as a person’s taxable income increases. The higher income will result in a higher percentage of tax paid. An increasing proportion of income goes to tax. By taking more from people with higher income to give to people who have less or none, the income is redistributed. In this system, the richest are burdened the heaviest, and is beneficial most to the individuals who have relatively low income. The poor can benefit from the tax money collected from the rich though transfer payments, health care, education, and road networks. However, this system is prone to have a disincentive effect. Peoples may be disincented to work or gain a larger income, as that income would be taxed more heavily. Similarly, this system provides an incentive not to work much, because the government can fund the living costs. This taxation system is used effectively in country such as Denmark, which is known for its low income gap, and relatively high living standards. However, this system probably works this well, because of the relatively small population. The government can concentrate on individuals, and efficiently allocate resources. In larger countries, the system might be inefficient, because it may cost a lot to devise a system, and distribute the money well.

Regressive-

In a regressive taxation system, the tax rate decreases as taxable income decreases. The higher the income, the smaller the tax is, relative to the income. This system encourages individuals of a society to work towards a larger income, making the economy as a whole more productive. However in this system, tax becomes a larger burden for the people who have lower incomes. In a way, the people who have lower income are the ones most in need of extra money, and so that value they are paying as tax is worth more to them. Although it is easy to assume that these people are poor because they do not work hard enough, this is not always the case. Some people may be stuck in a poverty cycle and cannot escape it.

I think that a proportional tax system works best in most cases. I am not fully convinced that redistributing income is the most efficient use of tax money. In trying to increase equity, there may be an inefficient allocation of resources. We can say that if the government provides education to all with the money collected through tax, this can lead to a more productive economy. However, if a tax system allows for money to be easily given to people who have not earned it, then the country loses human capital, decreasing the productivity. Is it more beneficial to have a growth in total income, or growth in income equality? I think a balance between the two is optimal, and therefore the proportional system, which taxes everyone at the same rate is the most just.

1 comment August 26, 2009