4.1.6 Flashcards
what are some reasons for a country to place restrictions on free trade?
- infant indsutry
- anti dumping
- raise tax revenue
- protect domestic employment
define dumping
firms sell their products abroad in export markets at below costs or significantly below prices in the home market.
explain why a country may restrict free trade to protect infant indsutries
A country may restrict free trade to protect infant industries as they have not yet achieved economies of scale and therefore face higher production costs than established foreign competitors. Without protection, these industries may struggle to survive in the face of cheaper imports. As a result of this protection, infant industries can invest in research and development (R&D), improve their efficiency, and eventually achieve economies of scale. Over time, this can lead to increased productivity, job creation, and economic diversification. For instance, South Korea’s protection of its automobile and electronics industries in the 1970s and 1980s allowed companies like Hyundai and Samsung to grow into global leaders.
EV: lazy and inefficent, trade retaliations and trade war
define import quota
a limit on the total quantity of imports allowed to supply a country
Draw the quota diagram
what is the impact of placing a quota?
analysis
- quota increase producer surplus and revenue, which can be used for further investment and expansion
- overall large fall in eocnomic welfare becuase consumers have to pay higher prices and unlike tarrif, government do not gain revenue
- strict import quotas may also create enforcemnt and compliance costs which may further drive up the cost of imports
draw tarrif diagram
tarrifs cause an overall loss of economic welfare, since the gains to governments and domestic producers are outweighed by loss of consumer surplus
evaluation points for tarrifs
- depend on PED for imports, reducing effectivness of tarrif
- depends on PES for domestic firms
- how is tax revenue used? - corruption
consequnece of tarrifs on income inequality- regressive
**cost push **inflation - trade retaliation and trade war
- increased import prices, higher cost of production- reducing export competitivness
- size of tarrif
- duration of tarrif
what are the impacts of tarrifs?
postive
postive:
* higher government revenues
* domestic producer surplus incraeses, more ouput and more jobs, short term economic growth
* decrease trade deficit
* increase FDI
negative:
* cost push inflation
* net loss of economic welfare
* regressive effects
draw trade subsidy diagram
“how may subsidies to domestic producers promote economic growth?
An export subsidiy incovolves government financial support to producers. The subsidy aims to lower the cost of production for producers, which they can then pass onto consumers, making their exports more internationally price competitve.For example, South Korea provided subsidies to its car manufacturers in the 1970s and 1980s, which allowed companies like Hyundai and Kia to lower their production costs and offer competitively priced vehicles in global markets. Over time, these firms grew into large TNCs, contributing significantly to South Korea’s economic growth. In theory lower prices will increase the number of exports of a country, increasing net trade and increasing AD. Combined with the outwards shift of SRAS from a reduced cost in production, as shown in diagram real output will increase.
what is the accelerator effect?
when an increase in consumer demand is then followed by an increase in capital investment of a business
explain the accelerator effect
- a positive accelerator effect occurs when a growth inc onsumer demand leads to a rise in planned cpaital investmnet by a business
- For example, rising demand for streaming services might lead to busineses such as Netflix and Disney+ in increase investmnet in server hardware
- Firms will increase capital spending because they need extra supply capcity and want to make higher profits in the long run
- As a result of an increase in net investment, the size of a country’s capital stock will rise and capita per worker employed will also grow
- this will then lead to an expansion of a nation’s productive potential especially if higher investment increases labour productivity
- this will then lead to outwards shift in LRAS and outwards shift of PPF
explain how the imposition of import tarrifs may lead to increased FDI within the country
US placing tarrifs on Mexico
analysis+ eval
Import tarrifs may discourage US-owned car manufacturers such as Ford and General motors from moving production of vehicles to Mexico and this will help to keep more car jobs in the USA especially in “rust belt” states where real icmomes have been falling and long term structural unemplyment has been increasing. If there are more people employed in the US car industry, this will help to maintain a standard of living and also increase tax revenue for the government via income tax. This may lower the US fiscal deficit and eventually contribute to controlling the size of the national debt.
However, the tarrif may increase income inequality in the US, as it may have regressive effects on consumers. For example higher prices on necessity goods such as Mexican avocados mean that those with lower incomes are paying a larger percentage of their income due to the tarrif, decreasing their affordability for other goods and services, reducing their living standards.
explain how the accelerator effect applies when US impose a tarrif on Mexico
The tarrif will lead to an increase in demand for domestic producers, which may cause a positive accelerator effect on capital investment. An increase in investment causes an outward shift in AD and LRAS.
But like trade retaliations
