4.1.6 Restrictions on Free Trade

Question 1

What is a tarriff?

Answer 1

A tax on imports made to make domestic good more appealing to domestic consumers

Question 2

On the diagram before the tarriff, what represents the level of imports?

Answer 2

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

Question 3

When imports are high, what happens to the circular flow of income?

Answer 3

AD curve shifts to the left as imports are a leakage from the economy

Question 4

What happens to the price when a tarriff is imposed?

Answer 4

The price rises from Pworld, to Ptarriff

Question 5

What happens to the level of imports when a tarriff is applied?

Answer 5

The level of imports falls from the difference between Q1 and Q2 to the difference between Q3 and Q4.

Question 6

Who are the winners when a tarriff is applied?

Answer 6

• domestic producers

- government

Question 7

Who are the losers when a tarriff is applied?

Answer 7

• domestic consumers

- foreign suppliers

Question 8

What happens to domestic producer surplus when a tariff is applied?

Answer 8

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

Question 9

What happens to the government budget when a tariff is applied?

Answer 9

As a tariff is a tax, the government gains revenue equal to box C

Question 10

What happens to domestic consumer surplus when a tariff is applied?

Answer 10

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

Question 11

What area on the tariff diagram is the net welfare loss?

Answer 11

Society loses areas B and D. the net societal loss

Question 12

What is a quota?

Answer 12

A physical limit on the amount of imports a country can bring in during a time period

Question 13

On a quota diagram, what is the size of the quota?

Answer 13

The vertical distance between Sdomestic and Sdomestic+quota

Question 14

Before a quota is applied what is the market price of the good?

Answer 14

P world

Question 15

Before the quota is applied, what is the quantity of imports?

Answer 15

Difference between Q1 and Q4

Question 16

Before the quota is applied, what is the revenue of world exporters?

Answer 16

A+B+C

Question 17

After the quota is applied, what is the level of imports?

Answer 17

Difference between Q2 and Q3

Question 18

What is the impact on domestic suppliers after a quota is applied?

Answer 18

Domestic suppliers make more revenue as the price rises to P+

Question 19

What happens to consumer demand for goods after a quota is applied?

Answer 19

Consumer have to pay higher price of P+ so total quantity falls from Q4 to Q3

Question 20

Why is there a net welfare loss to society after the implementation of a quota?

Answer 20

Because the gain in producer surplus is outweighed by the loss in consumer surplus

Question 21

What is an export subsidy?

Answer 21

A form of government intervention which encourages goods to be exported rather than sold in domestic markets

Question 22

Before the export subsidy is implemented, what is the level of imports?

Answer 22

Q1 - Q3

Question 23

Explain the analysis behind an export subsidy?

Answer 23

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.

Question 24

After the export subsidy, what is the level of imports?

Answer 24

Q2 and Q3 because domestic goods are now cheaper so no need to import

Question 25

Give 3 reasons as to why governments block free trade?-

Answer 25

• protect infant industry
• senile industry (protect inefficient firms)
• help balance of payments