4.1.6 restrictions on free trade Flashcards
what is a trade barrier?
a restriction placed on the import of foreign goods imposed by the government
what is free trade?
international trade without any barriers
what are the 4 types of restriction on free trade?
- tarrifs
- quota
- subsidies
- non- tarrif barriers
what is a tarrif?
import/ custom duties
tax on imported goods
draw tarrif diagram
- world supply shifts upwards
- extention in domestic supply
- contraction in domestic demand
- decrease in quantity of imports
overall: tariffs reduce quanity of imports
what are the effects of tarrifs on consumers, producers, governments shown on the diagram?
- producer surplus gained
- tax revenue raised
- welfare loss created
what are quotas?
a strict limit on the quantity of imports of goods
what are the drawbacks of quotas?
- no extra tax revenue
- severe shortages for consumers
what is a subsidy ?
when the government gives a grant to firms to increase supply
how does a subsidy to domestic producers work?
- grants given to firms, cheaper prices make domestic goods more competitive
- decrease in demand for imports, decraese in trade
- cost a government
decraeses trade
define non tarrif barriers
restrictions to free trade by setting rules and regulations for imports to follow
what are some non tariff barriers?
- health and saftey regulations
- enviromental regulation
- label regulations (correct BB dates)
restricting trade by setting rules and regulations to follow
what are the reasons to restrict free trade?
- preventing dumping
- protecting domestic employments
- protecting infant industries
- health and saftey
trade barriers aka protectionist policies
what is dumping?
when foreign firms aggresivley cut their prices belowaverage variable costs, to force out domestic producers from a market
short run loss, long run 100% market share and price manipulation
how do trade barriers protect domestic employment?
- consumers can’t buy as many cheap foreign imports, so must demand domestic
- if there is less demand for domestic goods, then there is less derived demand for labour, decraesaing domestic employment
keeps demand for domestic goods high
what is an infant industry?
new idsutries which do not benefit from economies of scale and cannoty compete with larger industries from other countries
higher production costs–> less competitive prices
how do trade barriers protect infant industries?
- infant industries do not benefit from economies of scale
- this means they have higher production costs
- connot compete with large industries from other countries
- subsidies to domestic producers can help reduce the price of their good
why are health and saftey reguations put in place?
or labelling
help to maintain health and saftey standards
