22. International trade Flashcards
Free trade
Free trade - take place between two countries where are no barriers to trade put in place by govs or international organizations
Arguments FOR protectionism
- Protecting domestic employment - but may prolong the decline of a company
- Protecting the economy from low-cost labour - higher P for consumers + other producers - less efficient
- Protecting infant industries - developed countries have large capital markets (where savings and investments are channeled)
- Avoiding over-specialization
- Strategic reasons (essentail industries such as food/steel/weapon in case of war) - political allies
- To prevent dumping - subsidizing can support dumping
- To protect product standards (safety and health standards) - may be only a made-up reason for protectionsim
- To raise gov. revenue
- To correct the net export revenue - works only in the short-run, doesn’t address the actual problem
Dumping
Dumping - selling by a country by large quantities of a commodity in another country at a price lower than its production costs
Arguments AGAINST protectionism
- Raise P to consumers and import producers
- Smaller variety
- Smaller competition - reduced innovation/efficiency
- Inefficient use of the world’s resources
- Reduced specialization - lower potential output in the world - lwoer efficiency
- May slow economic growth - lower trade
Types of protectionism
- Tariffs
- Subsidies
- Quotas
List the effects of a free trade on different stakeholders
- CONSUMERS: lower prices, greater choice - higher consumption
- DOMESTIC PRODUCERS: lower quantity, lower revenue - lower production
- FOREIGN PRODUCERS: higher quantity - higher production
Consumer surplus increase, producer surplus decreases - net welfare gain
Tariff
Tariff is a tax imposed on imported goods
Explain the sequence of events after a tariff is imposed
- Before tariff 0Q1 supplied by domestic, Q1Q2 by foreign producers at Pw
- Tariff shifts the Sw upwards by the size of the tariff
- Market P increases to Pw+T
- Due to the P increase quantity D falls from 0Q2 to 0Q4
- Domestic producers increase productiion to 0Q3, revenue increases from g to g+a+b+c+h
- Foreign producers supply Q3Q4, revenue falls from h+i+j+k to i+j, pays d+e to gov
- Governent receives d+e
- Dead-weight loss of welfare 1: Q4Q2 quantity is now not demanded - loss of consumer surplus equals to f
- Dead-weight loss of welfare 2: Q1Q3 is now produced by relatively inefficient domestic producers, foreign would produce this for h while domestic produce fro h+c - c represents the inefficiency - loss of world’s resources
Subsidy
Subsidy is an amount of money paid by the gov. to a firm per unit of output.
Explain the sequence of events after a subsidy is granted
- Before the subsidy 0Q1 supplied by domestic, Q1Q2 by foreign
- When subsidy is granted Sdomestic shifts downwards by the size of the subsidy to Sdomestic+subsidy
- Market price stays at Pw, quantity at 0Q2
- Domestic producers increase to 0Q3 - now receive Pw+subsidy per unit of output - revenue increase from a to a+b+e+f+g
- Foreign supply Q3Q2 - revenue falls from b+c+d to c+d
- Gov pays the subsidy of the area e+f+g
- Dead-weight loss of welfare 1: Q1Q3 quantity produced by relatively inefficient domestic producers, foreign would produce at cost b while domestic produce at b+g, waste of resources
- No loss of consumer surplus because the P doesn’t change, however gov uses tax revenues to pay the susbsidy
Quota
Quota is a physical limit on the number/value of a good that can be imported into a country.
Explain the sequence of events after a quota is proposed
- Before 0Q1 is supplied by domestic - Q1Q2 by foreign at Pw
- Quota of Q1Q3 is imposed
- Domestic producers supply at the same 0Q1 and Pw
- Foreign producers produce the quota of Q1Q3
- Excess demand is Q3Q2 at Pw - price rises
- Foreign producers cannot exceed their quota - domestic enter the market - attracted by the higher price - Sdomestic shifts to the right above Pw
- P settles at equilibrium at Pquota, the total quantity demanded falls to Q4
- Domestic producers now supply 0Q1 and Q3Q4 at Pquota, so the revenue increases from a to a+f+c+d+i+j
- Foreign producers supply the quota Q1Q3 at Pquota - revenue changes b+c+d+e to b+g+h
- Dead-weight loss of welfare 1: Q4Q2 are now not demanded, consumers don’t spend e, while the consumer surplus is equal to k 11. Dead-weight loss of welafre 2: Q3Q4 is now produced by relatively inefficient local producers, foreign producers produced at c+d now local produce at c+d+j, so world’s resources are wasted and the loss of efficiency is represented by j
Types of administrative barriers that gov. may impose
- “Red tape” - administrative processes involving paperwork before they can get the good into a country, may require legal work - slows down the import process and imposes costs
- Health/safety/environmental standards - restrictions on imports - important to use with purpose instead of using as protectionism
- Embargoes - an extreme quota - complete ban on imports placed as a form of political punishment
Why are nationalistic campaigns established
Gov. wants to e_ncourage consumers to buy domestic_ goods and preserve domestic jobs
