4.1.6 Restrictions on Free Trade Flashcards
(28 cards)
What is protectionism?
Protectionism are economic policies designed to restrict international trade to protect domestic industries from foreign competition
What are the reasons for protectionism?
Protecting domestic workers from job cuts due to competition
Allow infant industries to grow domestically
Shield from dumping
Cheap foreign labour
Reduce import demand lowering world prices
Raise government revenue
Improve current account deficit
What are tariffs?
Tax on imported goods
What are the other names for tariffs?
Import Duty
Customs Duty
What are the effects of a tariff?
Higher prices allow domestic firms to be more competitive with foreign markets
Reduces import demand
Why is world supply perfectly elastic?
Levels of quantity in just domestic markets are too small to influence the world price of a good
What does the tariff diagram look like before its imposition?
Domestic demand is greater than domestic supply so Q2 - Q1 would be imported as a result of excess demand
What does the tariff diagram look like after its imposition?
World price rises to P2 extending domestic supply and contracting domestic demand.
New import quantity is Q4 - Q3
What does the rectangle represent on the tariff diagram?
The tariff revenue generated
Distance between P1 and P2 is value of the tariff
What are the effects of a tariff on consumer/producer surplus?
Consumer surplus decreases due to increased in price whereas producer surplus increases
What is the negative impact of the tariff?
They cause deadweight loss found either side of the rectangle between the curves
What is a quota?
A quota is a physical control on the quantity of a good imported
What are the effects of a quota?
Reduce foreign competition for domestic producers
Quotas are unable to generate government revenue but raise goods prices
How does the quota diagram look before the imposition?
There is excess demand between Q4 and Q1 due to world supply
What does the tariff diagram look like after imposition?
Domestic supply shifts rightwards from Q1 to Q3 by the extent of the quota pushing world prices to Pquota due to excess demand
Where is the excess demand on the quota diagram?
Between Q2 and Q4, there is excess domestic demand which would normally be satisfied by imports but can no longer because of the quota
Why does domestic supply shift rightwards?
Higher prices incentivise new domestic entrants shifting domestic supply from Q1 to Q3
Where is the welfare loss in the quota diagram?
The excess demand
This is caused by how other countries have comparative advantages in producing this good
Domestic production may be inefficient
What are subsidies?
Payments to domestic producers to lower costs and increase affordability
What are the 2 types of subsidies?
Export subsidies
Import-reducing subsidies
What are export subsidies?
Help firm sell overseas at competitive prices
What are import-reducing subsidies?
Lower production costs to replace imports with domestic goods
What are non-tariff barriers?
Restrictions on trade that use regulations and administrative barriers to limit imports, either by increasing costs or causing delays
What are the impacts protectionism on producers?
Shields domestic producers from international competition
Reduce pressure for domestic innovation
Limits markets for foreign firms
