RENT THEORY OF PROFIT

RENT THEORY OF PROFIT

       The rent theory of profit is associated with the name of American economist, Francis A. Walker. According to him, profit are of the same genius as rent. The main points of Walker’s theory of profit can be summed up as such.

1.      Profit is rental in character. Just as superior grades of land earn more rent than the inferior grades of land, similarly superior entrepreneur due to their exceptional ability or opportunity earn more profit than the inferior entrepreneurs.

2.      As in the case of land, there is a no-rent or marginal land, so in the business also is a no-profit or marginal entrepreneur is one whose ultimate receipts from the sale of the commodities just cover his total costs.

3.      Just as rent is measured from the non-rent land, in the same way profit of the superior businessmen are calculated from the marginal entrepreneur.

4.      The rent does not enter into price of agricultural production of the manufactured goods.

          From all that we have said above, it can be concluded that profit are the reward of differential business ability.

CRITICISM:

     The modern Economist have discarded the Walker’s rent theory of profit on the following grounds:

Firstly, it simply provides a measure of profit. It does not throw light on the nature of profit which is more importance.

Secondly, Marshal is of the opinion that there is much difference between the rent of land and the entrepreneur’s profit. The rent of land can either be positive or zero, but in case of business, the total receipts from the sale of the product can fall short of total costs. So the entrepreneur may suffer losses and thus his profit may be in the negative. In the opinion of Marshall, the price of the commodity in the market is determined not by the cost of production of marginal firm but by the representative firm. Representative firm is the “which has a fairly long lease of life and has a firm degree of success, which is managed with normal ability and which has access to the normal economies of production”.

5.  It is also pointed out that profit may not from a part of the cost of production of a commodity in the short period but in the long period if the business is to be continued, it must enter in the price of the product.

Finally, profits do not arise simply because of the superior or exceptional ability of the entrepreneur, but they can also result due to chance gains or monopolistic position of the entrepreneur or they may be of the nature of the windfall income.

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THE ROLE OF PROFIT IN THE OPERATION OF A FREE ECONOMY

THE ROLE OF PROFIT IN THE OPERATION OF A FREE ECONOMY

             There are various theories which have been advanced from time to time regarding the nature of profit in a competitive economy. Almost all of them differ basically from one another and are inadequate to explain the actual role of profit in the operation free economy. The most important theories are:

        I.            Hawley’s Risk-bearing theory of profit.

      II.            Professor Knight’s uncertainty theory of profit.

    III.            Walker’s rent theory of profit.

    IV.            Clark’s dynamic theory of profit

HAWLEY’S RISK BEARING THEORY OF PROFIT

           This risk bearing theory of profit is associated with the name of F.B Hawley. According to him, profit is the reward of risk taking in business. During the conduct of any business activity, all other factors of production, i.e. land, labour, capital have their guaranteed income from the  entrepreneur. They are least concerned whether the entrepreneur makes profit or undergoes losses in a business activity. As we know, there are every chance at any moment in the variation of demand for the commodity produced, The demand may change due to changes in fashion, tastes, condition of trade, prices of substitutes, distribution of wealth, etc., or the project undertaken may prove to be a complete failure. In all such cases, if the entrepreneur is not able to cover his total costs from the sale of the commodities, then it is he who ultimately bears the loss. So he must be compensated for undertaking such risks.

              Thus, according to Hawley, profit is a payment or a reward for the assumption of risks by the entrepreneur. The greater the risk, the higher must be the profits. It is because if the return on risky enterprise is at the same level as that obtained from the safe investment, then not a single entrepreneur will invest his capital in a risky enterprise.

CRITICISM:

      Hawley’s risk theory of profit is criticized on the following grounds:

1.      According to Hawley’s, profit is a reward for bearing risks in a business the modern economists believe that there is no doubt that profit contain some remuneration for risk-taking in a business but it is wrong to assume that profits are in their entirely due to the element of risk. The profits can arise on account of better management, better supervision or they may be due to the monopolistic position of the entrepreneur or they may be due to sheer chance etc.

2.      Another criticism levied by carver is that profits arise not because risks are borne but because the superior entrepreneurs are able to reduce the risks.

3.      It is also pointed out that profit are never in proportion to the risk undertaken. It can happen that in a more risky enterprise, the profits may be low and high in a less risky enterprise.

4.      There are certain businesses where risks can be more or less accurately foreseen by statistical evidence, e.g. in insurance, the entrepreneurs who run these businesses earn profit. Thus theory fails to explain as to how the profits are earned in such business where the risk can be insured.

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THE ACCOUNTING AND ECONOMIST DEFINITION OF PROFIT

THE ACCOUNTING AND ECONOMIST DEFINITION OF PROFIT

(A) ACCOUNTING DEFINITION OF PROFIT:

               There is no satisfactory definition of the term profit. Generally profit of a firm is defined as the access of revenue over its current costs. The word cost carries. Different meaning with economists and accountants, in accounting, the term profit equals total revenue – explicit costs. This is the profit used by accountants to determine a firm’s taxable income. Explicit costs are the actual cash payments for resources purchased in resource markets. These are the rent the rent paid on land and plant and equipment, wages to labour, interest on capital, cost of raw material, transport charges etc. when all these explicit costs are substracted from the firm’s total revenue, we get gross profit or accounting profit. Accounting profit = total revenue – explicit costs.

      Accounting profit is explained by taking a simple example, let us suppose, the total revenue of a firm from the sale of goods inn 2006 is Rs. 90,000. Its costs on the purchase of raw material, payment of wages and other utilities i.e. explicit costs are 35,000. The firms accounting profit will be Rs. 55,000.

Total sales revenue……………Rs.90,000.

Cost of raw material……… = Rs. 15,000.

Wages to labour and other utilities = Rs. 20,000

Accounting profit = Rs. 90,000 – 15,000 + 20,000 = 55,000

(total revenue – explicit cost)

           When deprecation charges of capital equipment used by the firm and the amount of money paid to the government as taxes is deducted from gross profit accounting profit, we get net profit of accountants.

(B) ECONOMIC PROFIT:

           Economic profit is different from accounting profit. Accounting profit ignores the opportunity cost of the firm’s own resources used in the production of goods. The economist include cost of production. Thus economic profit equals total revenue less all costs both explicit and implicit.

   A firm’s implicit costs are the opportunity costs of using its self-owned, self-employed resources, implicit cost include use of firm’s own building, use of its own capital, and the business owner time given for the production of goods. While determining the total costs, the money payment which these self-employed resources could have earned in their best alternative uses should be worked out and added in cost. The implicit costs are in a way opportunity costs. Economic profit takes into account the opportunity costs of all resources used in production. Implicit costs also include normal profit earned by a firm. Normal profit is the minimum amount required to keep on entrepreneur engaged in the present line of production.

ECONOMIC PROFIT = TOTAL REVENUE LESS ALL COSTS BOTH EXPLICIT AND IMPLICIT.

Example: Suppose a person uses, his own resources, land, capital, his own time in the production of goods. The opportunity costs of these resources in included below in finding out economic profit of the firm.

Accounting profit                                   = Rs. 55,000

Entrepreneur’s own foregone salary     =Rs. 40, 000

Foregone interest on capital                  = Rs.   1,000

Foregone rent                                          =Rs.    2,000

Economic profit                                        =Rs.  12,000

                           OR

 Summing up (a) Accounting profit is the firm’s total revenue less its explicit costs (b) Economic profit to the economist, is the total revenue of a firm less explicit and implicit cost. Implicit cost includes normal profit to attract and retain an entrepreneur engaged in the present line of production Economic profit: if a firm’s total revenue exceeds all its economic costs both explicit and implicit, the residual which goes to the entrepreneur is called an economic or pure profit.

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PROFIT

PROFIT

MEANING OF PROFIT:

      Profit is a basic concept in market economy. Profit acts an incentive mechanism for business investment. Higher profits provide incentives for business growth. Profit also acts as an automatic signal for the allocation and reallocation of scarce resources. Profit which is the hub of all economic activities has no precise definition of its own, in fact it is the most controversial topic of economic theory. To get an accurate idea of profit it is necessary to first distinguish gross profit from net profit.

Gross profit and net profit:

(1) Gross profit is the surplus which accrues to a firm when it deducts its total costs in producing products from its total income received from the sale of goods. In producing goods, a firm incurs explicit is used in the sense of gross profit. The main elements of gross profit of a firm are as under.

        I.            Explicit costs: A firm’s explicit costs are the actual cash payments it makes to those who provide resources. For example, rent is paid on land hired, wages are paid to the employees, interest is paid on capital. In addition to this, a firm also pays insurance premium, and taxes and sets aside depreciation charges.

      II.            Implicit costs: Implicit costs are the opportunity costs of using resources owned by the firm or provided by the firm’s owners. To the firm, the implicit costs are the money payments that self-employed resources could have earned in their best alternative uses. for example, you are working as a manager in a shoe factory and getting Rs. 30000 salary per month, while calculating cost. Implicit costs include (a) rent on entrepreneur own land (b) interest on his own capital (c) wage of the entrepreneur which he could earn in alternative occupation.

NET PROFIT: Net profit is the profit which accrues to an entrepreneur for his functions as an entrepreneur. These function include risk bearing ability, innovating spirit, bargaining ability etc. Net profit is the reward of an entrepreneur for (i) organizing a business and undertaking risk (ii) his bargaining ability with the customers (iii) adopting new techniques of production (iv) monopoly gains if any (v) windfall gains due to sudden rise in the prices of goods.

In short:

Gross Profit     =      Total revenue – Total explicit costs

Net Profit         =     Total revenue    - Total explicit costs + Total implicit costs.

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SHIFT IN SUPPLY CURVE

SHIFT IN SUPPLY CURVE:

            When there is a change in quantity supplied of a good resulting from a change in any of its determinants, other than the price of a good. It causes the supply curve shift rightward or leftward. The supply curve can shift due to advance in technology, change in production cost, climatic changes etc.

REAL WAGE:

               The amount of goods and services which a worker actually receives for his labour is called his real wage depends upon the price level, opportunities of extra earning, status in the society, pension benefits etc.

Nominal wage:

            Nominal wage is the total amount of money income earned, by person for this work during a certain period.

RANKS OF ELASTICITY OF DEMAND TO BE NAMED:

           There are five degrees or ranks of elasticity

(i) Elasticity to unity. (Ed = 1)

(ii) Perfectly inelastic demand (Ed = O)

(iii) Perfectly elastic demand (Ed = 00)

(iv) Elasticity greater than unity (Ed >1)

(v) Elasticity less than unity (Ed<1)

OPPORTUNITY COST:

         The opportunity cost of capital is the available rate of return or the amount of income which could have been earned by investing in the next best alternative. For example, a person has Rs. One lakh in cash which he has kept in the locker, suppose the rate of return on the invested capital in the bank is 10% annually. If the money is kept in the locker, it earns no interest. In case it is invested, it yields 10% interest a year. So the opportunity cost of holding Rs. One lakh in locker is 10% interest which is foregone yearly.

QUASI RENT:

              Economic rent which can only be earned by man-made factors in the short run due to inelastic supply is called Quasi rent.

REGRESSIVE TAX:

           In case the rate of tax is lowered as the taxable income of an individual or firm increases the tax is called regressive. The burden of regressive tax falls more on the poor than on the rich people. Indirect taxes tend to be regressive.

PROGRASSIVE TAX:

             When the rate of increases as the taxable income of a person or firm increase, it is called progressive tax, in other words, the higher the income of a person, the higher the proportion of income paid in tax.

PROPORTIONAL TAX:

         When the rate of tax remains same on all the taxable slabs of income, it is called proportional tax. If the proportional rate of tax is 10%, a person with a taxable income of rs. 20,000/= will pay 2,000/= as the tax and another person with taxable income and maximum employment in the country.

GIFFEN PARADOX:

             The Giffen paradox is named after the name of British economist Robert. According to him there are certain cases of inferior goods to which the law of demand does not apply. These goods are named as Giffen goods. According to Giffen, “when the price of an inferior good decreases its demand decreases and when its price increases, its demand also increases. (the demand for inferior quality of rice increases with the rise in its price in low income groups)

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SCALE OF PRODUCTION

GLOSSARY

SCALE OF PRODUCTION:

                 Scale of production is set by the size of pant, the number of plants installed and the technique of production adopted by the producer. The scale of production is classified as under: (a) Small Scale Production.

(b) Large Scale Production.

(C ) Optimum Scale of Production

(a) Small Scale Production: If a firm produces goods with small sized plants, the scale of production is said to be small. Small scale of production is associated with low capital output and capital labor rations. In the small scale of production, the economies of scale do not occur to the firm.

(b) Large Scale Production: If a firm uses more capital and larger quantities of other factors, it is said to be operating on large scale. Large scale production enjoys both internal economies of scale.

(C ) Optimum Scale of Production: The optimum scale of production refers to that size of production which is accompanies by maximum net economies of scale. It is a scale at which the cost of production per unit is the lowest.

ALLOCATIVE EFFICIENCY:

          It is condition when the resources are used to produce the goods and services which are most preferred by consumers.

ARC ELASTICITY OF DEMAND:

        When price elasticity of demand is calculated between any two finite points on a demand curve, it is named ARC ELASTICITY.

ELASTICITY OF DEMAND:

       Price elasticity of demand is the degree of responsiveness of demand for a good due to the change in its price. It is computed by the percentage change in its price.

SUPPLY:

             Supply in the schedule of the quantities of a good which its producers are prepared to sell at various prices during a specified time period.

SUPPLY FUNCTION:

               Supply function is based on the law of supply. If states the relationship between the quantity supplied of a good ( as a dependent variable ) and its determinants ( as independent variables ) Q_s * =f(P_x).

SUNK COST:

              Sunk cost is that cost which has been incurred in the past and is not recoverable now. For example, the cost of advertising for the sale of product is a sunk cost.

SHUT DOWN COMPETITIVE FIRM:

             The price which is equal to the minimum average variable cost of the competitive firm and below which it will produce no output is called shut down price shut down=when price < AVC.

RENT:

            According to Ricardo, rent is that portion of the produce of earth which is paid to the landlord for the use of original and indestructible powers of the soil. In brief, it is the payment which the land owners receive for the use of their land.

REGRESSIVE TAX:

           In case the rate of tax is lowered as the taxable income of an individual or firm increases the tax is called regressive. The burden of regressive tax falls more on the poor than on the rich people. Indirect taxes tend to be regressive.

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KINKED DEMAND CURVE

GLOSSARY

KINKED DEMAND CURVE:

         It is a demand curve which illustrates price stickiness. The Sweezy’s model analyses the effects of possible reactions of the rival firms on the demand curve for the product of the firm which initiates the change in price. According to this model if one raise the price, then firm A will loose a part of its market share to the rival firms, one the other hand, if firm A reduces the price of its product, the rival firms follow the suit, then firm A does not lose or gain. The demand curve facing the firm A is now more elastic for a price rise than for a price fall. The model is used for explaining price stability in oligopolistic market.

 SHIFT OF DEMAND CURVE:

            When factors other than price change, the entire demand curve changes, it is called shift in demand curve. For example, if the income of the consumers increases, other things being equal, their demand for various goods increases and as a result the demand curve shifts to the right. On the other hand when there is a fall in the disposable income of the consumers, the demand for the goods decreases and the demand curve shifts to the left.

ORDINAL UTILITY:

         Hicks and R.G.D Allen are of the opinion that utility cannot be numerically measured. It can, however, be expressed ordinally. The consumer can rank his preferences for various combination of goods. For example, a consumer may prefer combination B or B to A or both combinations are equally preferred.

BUDGET LINE:

     Budget line depicts all combinations of two goods which can be purchased at their fixed price with a given amount of income.

CAPITAL:

      Capital is any good which used as input in the production process to produce other goods. For example, machines, car, mobile phone, building computers dams human skill etc. used to produce goods and services fall in the definition of capital.

CARDINAL UTILITY:

       According to Dr. Alfred Marshall, utility which a person obtain from the consumption of a good is measurable entity. For example, a person may get 20 units of utility from the consumption of an apple. So utility, which are just imaginary units, can be expressed in quantitative terms or in cardinal number such as 10. 15, 50, 90, 100 etc. the utility expressed in imaginary cardinal number shows the preference of a consumer for the good.

CARTEL:

         A group of producers which mutually agree to restrict competition in the market, they coordinate their output and pricing decision with the sole object of maximizing profit.

DEMAND CURVE SLOPES DOWNWARD:

              The demand curve slopes downward from left to right. It has negative slope. It shows invers relationship between the price of a good and its quantity demand. According to the law of demand when the price of good falls, its quantity demanded increases and vice versa other things remaining the same. It is the application of this law of demand that the demand curve slopes downward from left to the right.

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CONSUMER’S EQUILIBRIUM

CONSUMER’S EQUILIBRIUM:

           Consumer’s equilibrium or optimum is achieved when consumer ends up on the highest indifference curve possible with his given income. The optimum position is attained at the point where the consumption possibility line (budget line) is just tangent to the highest indifference curve from below.

INFERIOR:

        When with increase in income of a consumer, the demand for a certain good decreases, that good is called inferior good. Inferior of good is in respect of the income of the consumer. It has no relation with physical property of goods. For example, pulses, bread or course cloth are inferior goods. In case inferior good, there is negative relationship between income of a consumer and the quantity demanded of the good, in case of inferior good, the demand curve shifts to the income of the consumer leads to increase in demand for good. In case of normal good, the demand curve shifts to the right.

ZAKAT:

           Zakat is one of the five pillars of Islam. It means purification of soul character and wealth. It is an obligatory payment of certain percentage on a prescribed portion of wealth held b y a Muslim. So it is obligatory on all the Muslim who possesses on amount of wealth prescribed by Shari at.

WELFARE:

     Welfare is the satisfaction derived from the possession of wealth.

WEALTH:

        It means economic goods. It includes physical and financial assets which are owned by an individual or a firm or a nation minus liabilities.

WANTS:

         Human wants are the things which people would buy if  their income were unlimited. These wants also called needs are unlimited. They are also recurrent. They also change overtime.

WAGES:

         Wages are the money payment made for the service of labor for a certain period.

TAX:

        Tax is a compulsory contribution to the public authority for covering the cost of services rendered by it for the general benefit of its people.

VARIABLE COST:

              Variable cost is associated with the level of production. It increase when the level of output is increased and decreases as output is fuel, power charges etc. are variable costs.

UTILITY:

           Utility is the satisfaction which an individual derives from the consumption of a good. it is the want satisfying quality of a commodity. Utility is measured as the number of utile e,g. 5 units of utility.

TOTAL UTILITY:

           Total utility is the total satisfaction which a consumer derives from the consumption of a given amount of good

THEORY OF FACTOR PRICING:

     The theory of factor pricing deals with the determination of share prices of four factors of production i.e. land, labor, capital and enterprise.

TRANSFER EARNING:

       Transfer earning is the amount which a factor must earn if transferred to its second best use.

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BACKWARD BENDING SUPPLY CURVE OF LABOR

GLOSSARY

BACKWARD BENDING SUPPLY CURVE OF LABOR:

      The supply curves are positively sloped. However, in case of labor supply curve, there can be exception to it. The labor supply curve can be backward bending. The labor supply curve slopes upward from left with the increase in wage rate. After a certain rise in wage rate, the high wage individuals reduce their work and prefer to consume more leisure. The supply curve of labor then bends backward Further increases in the wage rate reduces the quantity of labor supplied in the market.

LAW OF DEMAND:

              The law of demand states the relationship between the quantity demanded and the price of a good. if states “ when the price of a good falls, its quantity demanded increases and when the price of a good rises, its quantity demanded decreases, other things being equal.” This law implies that the quantity demanded of a good and the price are inversely related.

LAW OF DIMINISHING MARGINAL RETURNS:

         This law in also named as the law of variable proportions, the law states  that when more and more units of a variable input are applied to a given quantity of fixed resources. The total output may initially increase at a diminishing rate and then at a constant rate b but it will eventually increase at a diminishing rate.

LAW OF DIMINISHING MARGINAL UTILITY:

          The principle state that as the consumption of a particular good increases over a given period of time, the extra benefit or the marginal utility decreases. In other words we can say that as a person gets or consumes more and more of a thing, his intensity of desire for that thing gradually diminishes.

LAW OF EQUI-MARGINAL UTILITY:

          The law of equi-marginal utility or the law of substitution states that a consumer is in equilibrium when he distributes his given money income among various consumer goods in such a way that marginal utility derived from the last rupee spent on each good is the same. In the case of three goods x, y and z a consumer is in equilibrium when mux/px= muy/py=muz/pz.

LAW OF INCREASING RETURNS:

         The law of increasing returns states, that when a firm adds more and more units of a variable factor to a given amount of fixed, resources, then each additional unit of variable factor  yields a higher marginal return.

ACCOUNTING PROFIT:

         Accounting profit is the difference between a firm’s total revenue minus its explicit cost.

ALLOCATIVE EFFICIENCY:

          It is condition when the resources are used to produce the goods and services which are most preferred by consumers.

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BARRIERS TO FOREIGN TRADE

BARRIERS TO FOREIGN TRADE

     In order to shelter home industries, foreign trade had been obstructed in various forms.

They in brief are:

1. Prohibition of imports or exports.

2. Custom duties.

3. Quotas.

4. Exchange control.

5. Preferential treatment.

6. Import monopolies.

7. Import levies.

1.      Import and export prohibition: The government of a country by law may totally ban the import or export of certain commodities for reasons of health or for promoting the growth of certain industries in the country for instance; when foot and mouth disease attacks cattle, the government totally prohibits the import of beef from that country.

2.      Custom duties or tariffs: Tariffs are the oldest form of protection. They are imposed on the import and export of commodities, when tariffs are imposed on the import of commodities, they are imposed on the export of commodities, they discourage exports and make the goods available for home producers. Tariffs or custom duties may be specific or ad-valoram. When tariff is based on weight, quantity or other physical characteristic of imported goods, they are called specific the duty is called ad-valoram when it based on value of the goods. Such a duty is fixed as percentage of the foreign or domestic valuation of imported goods.

3.      Exchange control: Exchange control implies the government regulations relating to buying and selling of foreign exchange. Under the system of exchange control, all exporters are required to surrender their claims on foreign exchange to the central bank of the country in exchange for domestic currency at the rate fixed by government. The government then allots the foreign exchange among the licensed importers. Exchange control may be resorted for correcting an adverse balance of payments or for protection home industry or foe conserving foreign resources or foe maintaining the exchange rate at a predetermined parity.

4.      Quotas: In order to reduce imports, the government of a country may restrict the total imports of a given commodity to a specified amount or specify the maximum amount of a commodity which can be imported from each producing country. When the total amount of goods to be imported is determined, the government then issues licenses for their import. This device of restricting imports is applied as an alternative to custom duties.

5.      Preferential Treatment: The government of country may give preferential treatment  in the rate of taxes to some of the countries. For instance, under the commonwealth preferential system exports have had, preferential treatment in U.K over goods from non-commonwealth countries. The granting of preferential treatment result in formation of trade blocks. The countries which are not giving preferential treatment impose high tariffs in relation to the goods of the discriminating countries. the international trade is thus hindered.

6.       Import monopolies: When the government of a country takes responsibility of importing all the commodities herself, we say the government has import monopolies.

Import licenses: Another barrier which restrict the import of goods from abroad is the import licenses. If the government of a country allows the import of foreign commodities to the licensed imports, the trade is very much brought under control. This method is adopted for curtailing imports and for the use of discrimination between goods and countries.

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PROTECTION

PROTECTION

     A policy of encouraging domestic industries by the imposition of tariffs on foreign products and payment of bounties to home industries is known as protection. An import duty aims at discouraging imports by making them dearer to the domestic consumers. The payment of bounty to home industry artificially stimulate exports and thus enables it to stand omits own feet in due course of time. After the end of napoleon war, i.e. in the 19^th century, protection appeared in U.S.A later on Germany, imposed custom duties on foreign products and developed her industries behind tariff walls. Great Britain which had taken an early star over ether countries in most branches of manufacture was the last to favor protection. The main arguments which are advanced to support the policy of protection are as follows:

1.      National Defense: Protection has been advocated on the ground that in times of war or any other emergency an entire dependence on foreign goods which are very essential for defense or consumption purposes is very dangerous. It is stated, therefore,, that a country must build up her own iron and steel industry and develop farming industry even if these involve an economic loss to the country.

2.      Preservation of certain class of population or certain occupation: the government of a country on political or social grounds may favor protection for preserving certain classes of people or certain occupations. For instance, the agrarian population is generally more submissive and loyal to the government than the industrial population. If government wishes to preserve this class of people, then it will levy heavy import duties on foreign agriculture raw material and thus encourage them to take interest in their farming industry.

3.      Diversification of Industries: Frederic list, a German economist, favors protection with a view to diversifying industries in a country. Under free trade, a country will specialize in the production of those commodities in which it has a relative price advantage over other countries. a country can specialize completely in one or few goods at the most. This means the country will put her eggs in one basket. If war breaks out or the export prices of the goods go down, then it will face severe hardship. It is, therefore, advocated that for bringing about a balanced economy in the country, protection should be given even to those industries which do not posses natural superiority.

4.      To assist new industries: Alexander Hamilton, Frederic list J.S Mill. Alfred Marshal, Tausig and other orthodox economists have clearly advocated protection for the industries which are still in their infancy. A newly-established industry, says list, is just like a newly-born baby. As the baby cannot grow up unless it is nursed and well protected, similarly an infant industry cannot face the blast of foreign competition unless it is given full protection till grows to its full structure. Protection to the new home industries is necessary because the industries in other countries have taken an early start and they are enjoying the economies of mass production, while the home infant industries are still in their early stages and are producing small output.

 The economists have justified protection for infant industries only. Once the industries grow up and reach maturity, protective tariffs should be removed. But in actual practice, it has been observed that infant industries never feel themselves grown up; if they grow up at all they devote their strength in fighting for bigger and longer protection.

Secondly, if protection is given to those industries which cannot stand on their own feet when left unprotected uses to less advantageous ones.

5. Protection to guard against dumping: If a foreign firm enjoying monopolistic or other advantages resorts to dumping with a view to capturing foreign markets, then the other countries must protect their industries by levying high protective duties on foreign goods. As selling of goods under cost (dumping) in other countries is temporary and sposmadic in nature. The anti-dumping duties should be imposed permanently on foreign products.

6. Keeping money at home: Protection is also advocated on the grossly fallacious argument of “keeping money at home” In the words of Robert Ingerson, “when we buy manufactured goods abroad, we get the goods and the foreigners get the money. When we buy the manufactured goods at home, we get both the goods and the money”. The criticism on this protection argument is that the foreign goods are purchased because these are cheaper and better then the home products. If we buy from the home market, this means we are buying in the bearer market. As consumers, we suffer a financial loss. We may buy the home products and suffer a loss for the sake of other considerations but not for simply keeping at home.

7. Protection of Revenue: Protection is also advocated on the ground that it raises revenue for the state. To this it is pointed out that if prohibitive high tariffs are imposed on the import of foreign goods, then they may not be imported at all and the government  would not able to collect the revenue at all On the other hand, if a moderate protecting industries.

8. Protection for Retaliation:  Some economists recommend that if a country uses high protection tariffs, the other countries which have trade relations with it should also impose custom duties on her products in relations from the study of the tariffs history, it has been observed that the retaliation tariffs have usually resulted in raising the tariffs still higher. It has been suggested, therefore, that commodity tariffs still should be imposed as a bluff but if the bluff does not make the other country to reduce the tariffs, then the countries should given them up because they can gain more by lowering tariffs, rather than by raising it.

9. Protection for conserving: Carey, Pattern, and Jevons have argued that protection is essential for preserving the natural resources of country. The unchecked trade often leads to exhaustion of mineral resources which are very vital for the development of the country.

10. Protection for maintaining high standard of living: it has been argued that a country with a high standard of living cannot successfully compete with a country having low standard of living. Because the country enjoying high standard of living has to pay high wages to its workers; which means high cost of production on the other hand, the country with low standard of living has to pay low wages to its employees which means low cost of production. The results of this disparity in money wages is that a country with high money wages is undersold by a country with low money wages. Hence, the former country must protect its industries by raising high tariff walls from the latter.

 The validity of this argument is questioned on the ground that if in a country, the money wages are high it is not necessary that the cost of production will also be high.

11. Protection for reducing unemployment:  it had been claimed that the use of tariffs discourages imports and raises their prices to the domestic consumers. This leads to diversion of demand for goods produced a home. The home industry in encourages and thus more employment is provided for the home population. This argument is contradicted on the ground that when tariffs are imposed on imports, the increase which has taken place in the employment in the protected industries will be offset by a decrease in the increase in the total employment of the country.

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FREE TRADE

FREE TRADE

THE THEORY OF FREE TRADE

              A policy of unrestricted international exchange of goods is known as the policy of free trade. Adam smith like the Physocratics of France, was a staunch advocate of free trade. He was of view that state should not interfere in the internal economic life of the citizens of a country as it hampers economic progress. He was against putting any kind of restrictions on the imports and exports of commodities. In the words of Adam smith “After all why the protection in needed just to save the gold from going into the other country. I do not give much importance to it. It is a kind of a commodity which is less important than other commodities because goods can serve may other purposes besides purchasing money but money can serve many purposes besides purchasing goods”.  If protection is levied, it will divert industries from more advantageous trade to less advantageous trade. “The other English economists also believed in the doctrine of Laissez-faire.

          The policy of free trade has not been carried out completely by any country of the world. Some degree of state regulation has always been there on the international exchange of goods. England was only country in the world which had maintained free trade for a long period. It was mainly due to the fact that it was more industrially advanced than the other countries, and so it suited her interest. in the late nineteenth century, there was a reaction in favor of protection from U.S.A and Germany and they set up the industries Great depression in 1930’s in recent years some attempts have been made to establish free trade areas on regional basis. In 1957, six country of Europe comprising France, Germany, Italy, Netherlands, Belgium, Luxembourg formed a European Common Market. A second area of regional free trade is established by Great Britain. Norway, Sweden, Denmark, Portugal, Australia and Switzerland and is known as E.F.T.A.

The main advantages which are claimed for free trade are as follows:

1.      If the policy of free trade is adopted by all the countries of the world, it promotes a mutually profitable international division of labor which leads to specialization in the production of those commodities in which they have the greatest relative advantage. The diversification of human and material resources of the country into remunerative channels results in increasing the real national product of all the countries. The standard of living of the people all over the world goes up.

2.      Free trade is undoubtedly the best from the point of view of the consumers, because they can get winder range of goods and commodities at lower price. When protection is levied, the choice is reduced and the prices of commodities go up the consumers then stand at a disadvantage.

3.      Free trade has the merit that it prevent the establishment of injurious monopolies.

4.      Under Free trade, the home producers try to put forth their best because they are faced with foreign competition. They quickly adopt the changes which are made in the designs of commodities or in methods of production.

5.      The factors of production are freely able to move from one place to another or from one occupation to another occupation and thus are able to secure high rewards for their services.

DISADVANTAGES:

    The main arguments which are advanced against free trade are as under:

1.      One of the most captivating argument put forth against free trade is that it leads to cover-dependence upon other counties. In time of war or any other emergency, the over-specialization countries may not be able to supply the required goods o non-specialized ones.

2.      It is pointed out that under system of free trade, the economically backward country remain always at a disadvantage with the economically advanced country. So in order to build up industries, the backward nation must erect traffic walls. U.S.A. and Germany in the late 19^th century abandoned free trade, because they were late in entering the industrial field. They developed the industries behind tariff barriers. So is also the case with India.

3.      When trade is unrestricted, the import of injurious harmful goods cannot be hindered.

4.      Under free trade, it a country resorts to dumping with a view to capturing foreign markets, the home industries cannot be protected.

5.      Another argument advanced against free trade is that international specialization leads to an unbalanced economy of the country.

     In the past, all the countries of the world have abandoned free trade and have turned protectionist. In the last few years, there is again, a reaction in favor of free trade on regional basis. It has been experienced by the member of the ECM that the reduction of tariffs has greatly increased their trade with one another and the consumers have been able to get goods at cheaper prices.

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