Trade + Protectionism

Question 1

State + explain the macro effects of free trade.

Answer 1

• Growth: countries who exploit their comparative advantage / specialise / have surplus can then export that to rest of world - increasing X + (X - M) + AD - higher growth - leads to job creation.
• Unemployment: industries who aren’t competitive - jobs may be lost as those industries decline.
• Inflation: with free-trade, firms can access their raw materials at lower P - reducing C + Cost-push inflation.
• Current Account: countries with large comparative advantages may be able to exploit those well - leading to CA surpluses. While those with limited comparative advantages may have CA deficits.
• Inward FDI: if trade is negotiated / free trade deals are signed - often inward FDI is part of that free trade deal.

Question 2

State + explain the micro effects of free trade.

Answer 2

• Economies of Scale: can be exploited by firms now accessing a greater market.
• Lower Prices: for consumers- higher consumers surplus as a result. Also lower P for firms - lower CoPs.
• Higher Quantity / Choice
• Technological Diffusion: tech spreads faster with free trade - firms that are making more profit due to accessing a greater market can reinvest that profit into tech advancements - dynamic efficiency.

Question 3

State + explain the macro reasons for protectionism.

Answer 3

• Unemployment: protect against domestic unemployment.
• Government Finances: raise revenue - major source of tax revenue is actually tariff revenue. Especially beneficial for developing countries.
• Current Account: helps reduce CA deficit.
• Growth: by squeezing M, as long as X stays the same - (X - M) increases - higher economic growth.

Question 4

State + explain the micro reasons for protectionism.

Answer 4

• Infant Industry: small firms to grow in size + develop EoS.
• Dumping: good is sold overseas at a P below CoPs - due to there being excess S in that initial country (i.e. through gov subsidies, min P, etc).
• Standard / Regulations: protect consumers with protect standards, protect environment with environmental standards, protect workers with health + safety standards.

Question 5

State + explain the macro effects of protectionism.

Answer 5

• Unemployment: protect against unemployment - prevent it rising + can actually create jobs.
• Current Account: can squeeze M - improves CA position + lead to higher economic growth.
• Inflation: tariffs + quotas that increase P of M can be inflationary (i.e. if on raw materials - firms see higher cost push inflation)
• Inequality: if tariffs are imposed that are highly regressive - risk of income inequality rising.
• Gov Finances: tariffs that raise revenue for government can help to raise gov finances.

Question 6

State + explain the micro effects of protectionism.

Answer 6

• Higher Prices (Surplus): lower CS + higher domestic producer surplus.
• Lower Quantity + Choice
• Domestic Producer Revenue: increases with tariff.
• Foreign Producer Revenue: decreases with tariff.
• Inefficiency: allocative inefficiency + complacency if tariffs are imposed + they’re there for a long time.