One More Benefit of Free Trade
Economists can explain the effects of tariffs using supply and demand diagrams. Supply and demand diagrams, however, show the effect that tariffs have on the supply and demand of a specific good or service, not the effect that the tariff may have on an entire economy. How can one demonstrate the effect that tariffs have on national wealth generally? One mathematical tool that can shed some light on the effects tariffs have on national wealth is correlation.
What is correlation? Correlation means that two or more sets of numbers have a mathematical relationship. If two variables are correlated, then they vary together. If the relationship is linear, then there are three basic types of correlation: positive, negative, and none. A positive correlation means that as one variable increases so does another. A negative correlation means that as one variable increases another decreases. No correlation occurs when one variable increases and there is no corresponding increase or decrease in another variable.
Correlation does not always mean causation. For example, when ice cream sales increase crime tends to increase as well. No rational person believes that ice cream sales cause crime. So what is happening? Both variables are connected by another one that is, at first glance, unseen (economists love the unveiling the unseen versus the seen). The common variable between the two, known to statisticians as a lurking variable, is the summer time. Crime and ice cream sales appear to be influenced by the seasons but not by each other.
There are, however, times when two variables are likely connected by a cause and effect relationship. College administrators are well aware of the positive correlation between SAT scores and academic performance. As SAT scores increase, GPAs tend to increase as well. The data points tend to lie close to a trend line, a line that