protectionism

Question 1

define protectionism

Answer 1

protectionism is trade policies to shield domestic industries from foreign competition

Question 2

reasons for protectionism?

Answer 2

1. protect infant industries
2. protect sunset industries
3. protect current acc balance (fix trade deficit)
4. prevent dumping

Question 3

reasons against protectionism?

Answer 3

1. raises mkt power of domestic firms → some firms become monopolies → mkt failure bc no AE
2. beggar thy neighbour effect → X of trading partners fall → their AD decreases → they have less purchasing power for M → domestic countries X decreases → AD decreases → limits EG + BOT worsens → macroeconomic goal not achieved
3. retaliation of trading partners → they impose their own trade restrictions → domestic X decreases → reverse multiplier → limits EG + cyclical unemployment + BOT worsened
4. sunrise indus deprived of econ resources → if sunrise industries are protected for too long, they will be deprived of econ resources (eg labour) → X competitiveness falls → RNY decreases → limits EG + cyclical unemployment + BOT worsened + decrease FDI which further decreases AD

Question 4

protectionist measures?

Answer 4

1. tariffs
2. quotas
3. bans
4. X subsidy
5. rules & regulations

Question 5

how do tariffs work?

Answer 5

• tax on imported goods → decreases shortage
  [diagram: dd/ss → 2 price ceilings → lower ceiling: Pworld → higher ceiling: Pworld+tariff → Qs increases, Qd decreases → shortage decreased

Question 6

how do quotas work?

Answer 6

• limits qty of foreign goods imported → consumers can consume domestic substitutes instead
• leads to DWL

Question 7

how do bans work?

Answer 7

• its an extreme form of quota

- leads to DWL

Question 8

how do export subsidies work?

Answer 8

• lowers COP → helps firms be more competitive in the global mkt

Question 9

how do rules and regulations work?

Answer 9

• makes process of importing more time-consuming and complex
• decreases willingness to export to that country (?)

Question 10

advantages of protectionism on an economy?

Answer 10

1. M subjected to trade restrictions → PEDm>1 → higher price of M → MTP decrease of Qd → M decreases → (X-M) increases → AD increase via k + C increase (bc switched to consuming domestic goods) → decreased cyclical unemployment → macroeconomic aim of EG achieved
   +++ (X-M) increased → BOT improved → BOP improved

Question 11

disadvantages of protectionism on the economy?

Answer 11

1. tariffs on raw materials → unit COP increases → SRAS decreases → GPL increases → cost push inflation
2. trade barriers on M → trading partners decrease GDP → purchasing power of trade partners decrease → dd for X from country that initiated protectionism will decrease → (X-M) decrease

Question 12

advantages of protectionism on producers?

Answer 12

1.firms in protected industries benefit → less efficient (domestic) firms can survive → production increases → increased revenue

Question 13

disadvantages of protectionism on producers?

Answer 13

1. other firms that use protected goods as inputs may suffer → higher COP → decreased profit margins → decreased profit

Question 14

advantages of protectionism on workers and consumers?

Answer 14

1. workers in protected industries benefit → higher output → greater derived dd of labour → decreased unemployment → mSOL preserved

Question 15

disadvantages of protectionism on workers and consumers?

Answer 15

1. firms using protected goods as inputs → higher COP → consumers pay higher prices for final product → consumer welfare decreases