Protectionism

Question 1

What do tariffs aim to do

Answer 1

Protect domestic industries from overseas competition by increasing the relative price of imports, thereby causing a fall in import demand

Question 2

Benefits of tariffs

Answer 2

Generate tax revenues for the government who levy tariffs.

May also improve the trade balance.

Question 3

Why does consumer surplus do following a tariff

Answer 3

Falls - as consumers are hit by higher prices

Question 4

What happens to overall economic welfare as a result of import tariffs

Answer 4

Falls - there is a deadweight loss of economic welfare / loss of economic efficiency

Question 5

Impact of an import tariff on domestic producers

Answer 5

Initially benefit - protected from lower prices imports and expect an increase in output at a higher price

Question 6

Impact of an import tariff on foreign (overseas) producers

Answer 6

It is a barrier to trade and squeezes demand leading to lower revenues and profits

Question 7

Impact of an import tariff on consumers

Answer 7

Consumers face higher prices - fall in real incomes. May affect lower income households more. Loss of consumer choice (lower utility)

Question 8

Impact of an import tariff on the government

Answer 8

Tax revenues rise initially from having imported tariffs - rising GDP and profitability of suppliers

Question 9

Evaluation point on the impact of an import tariff on domestic producers

Answer 9

Possible X-inefficiencies bc of reduction in intensity of market competition

Question 10

Evaluation point on the impact of an import tariff on foreign (overseas) producers

Answer 10

Producers may be able to shift production / exports to countries or regions where import tariffs are lower

Question 11

Evaluation point on the impact of an import tariff on consumers

Answer 11

Depends on PED of good affected

Question 12

Evaluation point on the impact of an import tariff on the government

Answer 12

Adverse effects of possible retaliatory tariffs on other industries - slower economic growth from higher inflation

Question 13

Examples of non-tariff barriers (NTBs)

Answer 13

• intellectual property laws e.g. patents
• domestic subsidies
• financial protectionism
• managed XRs

Question 14

What are preferential procurement policies (NTBs)

Answer 14

Where governments favour local producers when finalising contracts for infrastructure projects or purchasing new defence equipment

Question 15

What is a quota

Answer 15

A physical quantity (supply) limit on the volume of imports of a product

Question 16

What is the effect of quota

Answer 16

To create excess demand for imports for a given level of demand (pushes up the market price)

Question 17

Consequence of an import quota on government tax revenues

Answer 17

No direct effect - a quota is different from a tariff

Question 18

Consequence of an import quota on consumer surplus

Answer 18

Fall - higher prices reduces consumer welfare

Question 19

Consequence of an import quota on overall economic welfare

Answer 19

Falls - quota restricts free trade and leads to deadweight loss of economic welfare

Question 20

Evaluation of the impact of an import quota on domestic producers

Answer 20

Domestic firms might become less productively efficiency

Question 21

Evaluation of the impact of an import quota on consumers

Answer 21

Consumers who work for domestic firms may benefit from higher employment. Might stimulate increased investment in alternatives.

Question 22

Evaluation of the impact of an import quota on the government

Answer 22

No immediate tax revenues from an import quota - a contrast with an import tariff

Question 23

Recent example of import quotas in the news

Answer 23

EU sugar import quota scheme will come to an end (2017)

Question 24

What is a subsidy

Answer 24

Any form of financial help given to domestic producers in order to lower their costs and help them compete in international markets

Question 25

What is a subsidy a form of

Answer 25

Non-tariff barrier

Question 26

What does a subsidy cause

Answer 26

A parallel downward shift in the supply curve

Question 27

What do we assume about subsidies

Answer 27

That they are not large enough to change the world supply price but it does not give domestic firms a higher price (= world supply price + the subsidy)

Question 28

What does a subsidy cause

Answer 28

A rightward shift on the supply curve