Restrictions On Free Trade

Question 1

What is a tariff (4)

Answer 1

Tax levy on imports
Make them more expensive
Consumers switch to cheaper domestic products
Expenditure switching policy

Question 2

Why are imports bad for economy (3)

Answer 2

They are a leakage
BoP worse
AD falls = reduced EG + negative multiplier effect

Question 3

Tariff diagram (6)

Answer 3

Imports fall to Q3-Q4
Reduced consumer surplus A,B,C,D
Rise in domestic producer surplus A
Gain tax rev of C
Net loss of B+D
C+A transfer of benefit = cancel each other out

Question 4

Winners of tariff (3)

Answer 4

Domestic producers = surplus
Gov tax revenue
Domestic firms + workers = more demand

Question 5

Losers of tariff (3+)

Answer 5

Reduced consumer surplus = less choice
Overseas firms = reduced demand for export + pay tariff to move goods
Domestic consumers = pay higher price

Question 6

What is an export subsidy (3)

Answer 6

Subsidise domestic firms to reduce price
Exports now cheaper so foreigners demand it
Exmaple = France with yoghurt called Danon

Question 7

Problem with export subsidy

Answer 7

Illegal within customs union

Question 8

What are exchange controls (2)

Answer 8

Restrict supply of foreign currency
Increase control over price of exports going abroad

Question 9

What is a voluntary export restraint (3)

Answer 9

The domestic government decide reduce the number of exports that they will send abroad
E.G = Taiwan agreed to reduce the level of footwear to Europe + Japan agreed to reduce the number of cars to Europe + Russia reduced the number of xmas cards to Europe
The foregin exporter purchases a licence from its government and then exports its allocated amount.

Question 10

Technical standards - what (2+)

Answer 10

To help domestic firms govs impose standards that all goods must adhere to which prevents foreign goods entering the country
E.G in Germany beer must be made with natural ingredients and this prevented Budweiser selling Bud at the football world cup in 2006

Question 11

Public procurement (purchasing) policy - what (2)

Answer 11

Gov decides that certain goods and services must be purchased by public departments
E.G the Cabinet must buy British water.

Question 12

What is a quota

Answer 12

Physical limit on number of imports coming in

Question 13

Example of use of quota

Answer 13

USA limited Japanese car imports to 2 million per year

Question 14

What does quota lead to (2)

Answer 14

Reduced sales for foreign companies
Domestic prices pushed up = reduced welfare

Question 15

Quota diagram (4)

Answer 15

Fall in imports to Q3-Q4
Increased domestic revenue
Consumer spay increased price - demand reduces Q2 to Q4
Prior to quota = exporters have revenue if A+B+C

Question 16

What assumptions does quota make (3)

Answer 16

That the quality is good enough to mean increased demand
That firms have enough land, labour, capital, cash to expand
Essentially - will co summers buy and can firms respond

Question 17

Advantages of protection measures (5)

Answer 17

Reduced negative externalities - environment
Reduced BoP deficit
Increase in domestic production = employment
Prevents illegal dumping
Allows infant industries to grow

Question 18

What is dumping + example (2+)

Answer 18

Firms sell products abroad below market price
China dumping steel on EU markets - others can’t compete = British steel factory closed recently

Question 19

Disadvantages of protection measures (5)

Answer 19

Retaliation = conflict
Foreign traders = reduced demand
Goes against principles of comparative advantage = trade diversion
Inefficient firms are protected
Creates cost push inflation

Question 20

Why would you use protection measures (6)

Answer 20

Protects infant industries
Protects senile industry = dying industry = in the long term won’t work tho
Diversify economy = different products
Raise gov revenue
Helps BoP
Protection against dumping

Question 21

What doesn’t the WTO like

Answer 21

Trading blocks