4.1.6 Restrictions on Free Trade Flashcards
What is a tarriff?
A tax on imports made to make domestic good more appealing to domestic consumers
On the diagram before the tarriff, what represents the level of imports?
Domestic suppliers can only supply at Q1, but consumers want Q2, so excess demand
The difference between Q1 and Q2 is the level of imports to fill the demand
When imports are high, what happens to the circular flow of income?
AD curve shifts to the left as imports are a leakage from the economy
What happens to the price when a tarriff is imposed?
The price rises from Pworld, to Ptarriff
What happens to the level of imports when a tarriff is applied?
The level of imports falls from the difference between Q1 and Q2 to the difference between Q3 and Q4.
Who are the winners when a tarriff is applied?
- domestic producers
- government
Who are the losers when a tarriff is applied?
- domestic consumers
- foreign suppliers
What happens to domestic producer surplus when a tariff is applied?
As the price has risen, the difference between what the producer is willing to charge and what they actually charge is greater. This is applicable to point A on the diagram
What happens to the government budget when a tariff is applied?
As a tariff is a tax, the government gains revenue equal to box C
What happens to domestic consumer surplus when a tariff is applied?
Domestic consumer surplus falls as the difference between what the consumer is willing to pay and what they actually pay is smaller. This is equal to box A+B+C+D on the diagram
What area on the tariff diagram is the net welfare loss?
Society loses areas B and D. the net societal loss
What is a quota?
A physical limit on the amount of imports a country can bring in during a time period
On a quota diagram, what is the size of the quota?
The vertical distance between Sdomestic and Sdomestic+quota
Before a quota is applied what is the market price of the good?
P world
Before the quota is applied, what is the quantity of imports?
Difference between Q1 and Q4
Before the quota is applied, what is the revenue of world exporters?
A+B+C
After the quota is applied, what is the level of imports?
Difference between Q2 and Q3
What is the impact on domestic suppliers after a quota is applied?
Domestic suppliers make more revenue as the price rises to P+
What happens to consumer demand for goods after a quota is applied?
Consumer have to pay higher price of P+ so total quantity falls from Q4 to Q3
Why is there a net welfare loss to society after the implementation of a quota?
Because the gain in producer surplus is outweighed by the loss in consumer surplus
What is an export subsidy?
A form of government intervention which encourages goods to be exported rather than sold in domestic markets
Before the export subsidy is implemented, what is the level of imports?
Q1 - Q3
Explain the analysis behind an export subsidy?
The govt gives a subsidy to domestic producers in an attempt to boost exports. This shifts the Sdomestic1 to the right to Sdomestic2. Means domestic producers are more price competitive which means domestic production has increased from Q1 to Q2.
After the export subsidy, what is the level of imports?
Q2 and Q3 because domestic goods are now cheaper so no need to import
