Summary of Trade Policies

Question 1

A tariff is

Answer 1

a tax levied when a good is imported.

Question 2

An export subsidy is

Answer 2

a payment to a firm or individual that ships a good abroad.

Question 3

An import quota is

Answer 3

a restriction on the quantity of a good that may be imported.

Question 4

A voluntary export restraint works

Answer 4

like an import quota, except that the quota is imposed by the exporting country rather than the importing country.

Question 5

A local content requirement is

Answer 5

a regulation that requires a specified fraction of a final good to be produced domestically.

Question 6

Government procurement:

Answer 6

Many government agencies are forced to purchase from home suppliers, even when they charge higher prices (or at inferior quality) compared to foreign suppliers.

Many times is linked to a local content requirement.

Question 7

Bureaucratic regulations (red tape):

Answer 7

Safety, health, quality, or customs regulations can act as a form of protection and trade restriction.

Question 8

Effects of Tariff:

1. Producer surplus
2. Consumer surplus
3. Government revenue
4. Overall national welfare

Answer 8

1. Producer surplus - increases
2. Consumer surplus - falls
3. Government revenue - increases
4. Overall national welfare - ambiguous (falls for small countries)

Question 9

Effects of Export Subsidy:

1. Producer surplus
2. Consumer surplus
3. Government revenue
4. Overall national welfare

Answer 9

1. Producer surplus - increases
2. Consumer surplus - falls
3. Government revenue - falls (government spending rises)
4. Overall national welfare - falls

Question 10

Effects of Import quota:

1. Producer surplus
2. Consumer surplus
3. Government revenue
4. Overall national welfare

Answer 10

1. Producer surplus - increases
2. Consumer surplus - fallas
3. Government revenue - no change (rents to license holders)
4. Overall national welfare

Question 11

Effects of Voluntary Export Restraint:

1. Producer surplus
2. Consumer surplus
3. Government revenue
4. Overall national welfare

Answer 11

1. Producer surplus - increases
2. Consumer surplus - falls
3. Government revenue - no change (rents to foreigners)
4. Overall national welfare - falls

Question 12

When is negative welfare-effect expected when it comes to trade polices?

Answer 12

We expect negative welfare-effects for the home economy due to the
introduction of an export subsidy, a voluntary export restraint and an import quota
(if the rents accrue to foreigners) and a tariff (if the home economy is small relative
to the foreign economy).