I was going through the bibles of Trade and Market strategies. I thought I would be able to come to some conclusion regarding the pros and cons of free market.
To my awe! I got even more confused …. I will try to pen down some of the main pointers … Cheers.
Open market is a great way of monitoring and controlling the market of a nation, more specifically a developed nation. I would not like to specify of the countries here but more or less all of the industrialized nations have free market.
Let’s define the free market now:
Open market operations allow central banks great flexibility in the timing and volume of monetary operations at their own initiative, encourage an impersonal, businesslike relationship with participants in the marketplace, and provide a means of avoiding the inefficiencies of direct controls.
So the definition suggests it is basically an indirect control of the monitory policy. The direct control is considered as closed one.
In open policy the banks have more power to influence the economy of the nation indirectly. Especially in the free markets, a centralized bank take the leadership. Which is trustworthy to the people who are impacted and also possesses good fame to the Customers and Client banks, in some countries it could be a public sector bank.
The Government needs to influence the market for various reasons; one may be, for collecting more funds or attracting the investors to invest in that country. Thus the Government will try to inject money or pull out cash on time to time basis. This complex operation could be done by straight a way controlling the market and releasing straight orders to the different financial institutions or by influencing the market by taking steps, that is indirect steps. It could be done by buying or selling in market, thus injecting or pulling fund.
This is a matter of debate, that which operation is a better practice. But IMF and classical research proves that the market with a open trend is more fruitful. Not only because of that the investor has more trust but also it helps different companies from all over the globe to operate in local market.
It is seen from the practical experience that the country with a open market has more gdp then the country with a strict regulation rules.
Open market operations affect the money supply and related financial measures through their impact on the reserve base of the banking system. As a matter of monetary policy tactics in controlling these reserves, open market operations can be conducted in one of two ways: actively, by aiming for a given quantity of reserves and allowing the price of reserves (that is, the interest rate) to fluctuate freely; or passively, by aiming at a particular interest rate, allowing the amount of reserves to fluctuate. Industrial countries, with well-developed and sensitive markets, normally employ a passive approach, although there have been exceptions. A passive approach also appears to be the norm in emerging markets that have reached a certain level of sophistication. There are advantages to a more active approach in developing countries, however. In such countries, the absence of efficient secondary or inter-bank markets--to transmit the influence of monetary policy--might be one reason for an active approach.
In the mean time free trade helps.
A simple economic analysis using the law of Supply and Demand and the economic effects of a tax can be used to show the clear benefits of free trade.
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 price to Ptariff. The higher price causes domestic production to increase from QS1 to QS2 and causes domestic consumption to decline from QC1 to QC2. This has three main effects on societal welfare. 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.
An almost identical analysis of this tariff from the perspective of a net producing country yields parallel results. 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 qoutas, and export qoutas all yield nearly identical results. Sometimes consumers are better off and producers worse off, and sometimes consumers are worse off and producers are better off, but the imposition of trade restrictions causes a net loss to society because the losses from trade restrictions are larger than the gains from trade restrictions. Again, trade restrictions are a net loss and free trade is a net gain.
We can’t comment on the superiority of the policy but surely we can say that the free market is a more refined approach which broke the barrier of the primitive closed market, and this may be called as supremacy, a supremacy that gave birth of globalization.
The naysayers please excuse!!
Globalization in the era since World War II has been driven by advances in technology which have reduced the costs of trade, and trade negotiation rounds, originally under the auspices of GATT, which led to a series of agreements to remove restrictions on free trade. The Uruguay round (1984 to 1995) led to a treaty to create the World Trade Organization (WTO), to mediate trade disputes. Other bi- and trilateral trade agreements, including sections of Europe's Maastricht Treaty and the North American Free Trade Agreement (NAFTA) have also been signed in pursuit of the goal of reducing tariffs and barriers to trade.
Just to conclude:
The economic case for an open trading system based on multilaterally agreed rules is simple enough and rests largely on commercial common sense. But it is also supported by evidence: the experience of world trade and economic growth since the Second World War. Tariffs on industrial products have fallen steeply and now average less than 5% in industrial countries. During the first 25 years after the war, world economic growth averaged about 5% per year, a high rate that was partly the result of lower trade barriers. World trade grew even faster, averaging about 8% during the period.
Rest is your own research, your own speculation………
References:
Wiki.
WTO
International Monitory Fund.
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