2.2.2 Methods Of Protectionism

Question 1

What are tariffs and what do they do

Answer 1

Tariffs are tax on imported goods to make them more expensive

Tax will reduce the demand for imported goods and increase demand for domestic goods
Advantage is that it protects domestic industries and also provides the government with more revenue
However if tariffs are too high imports may cease and the government revenue will be zero

Question 2

What are quotas and what do they do

Answer 2

Quotas are physical limit on the quantity of imports allowed in a country

Domestic producers face less threat and will have more market for themselves. they are able to supply the demand and thus protect their employment. May take a while for prices to rise

However prices of imports will rise because there is less supply
Consumer choice is limited and domestic producers may fail to improve efficiency

Question 3

What are subsidies and how do they help

Answer 3

They are money provided by the government to give firms support

This will lower cost of production for producers which will increase supply and makes it easier to sell since exports are cheaper. Encourages competition

More domestic firms will be encouraged to enter the market, this will boost exports and unemployment and the current account.
However it costs the government money so opportunity cost, money might be more effective elsewhere
If domestic producers are introduced to competition their products may become inferior and they’d lose incentive to innovate. Global growth will slow and living standards fall.