4.1.6 Restrictions On Free Trade

Question 1

What is free trade?

Answer 1

Aims to maximise global output based on the principle of comparative advantage

Question 2

What is protectionism?

Answer 2

• way to limit free trade by limiting imports, limiting export in order to protect domestic industries

Question 3

Reasons for restrictions on free trade?

Answer 3

• infant industries : protect new firms due to the level of global competition
• sunset industries : declining industry so gov chooses to support them to limit the economic damage
• dumping : foreign firms sell product at unfairly low prices in foreign markets - can harm a country’s industries
• current account deficit : aims to help the imbalance
• employment : when firms outsource production to other countries = structural unemployment = protect jobs

Question 4

What is a tariff?

Answer 4

Tax on imports

Question 5

What are quotas? And the impacts?

Answer 5

Physical limit on imports
- set below the free market level of imports

• domestic producer revenue increases = increased output at higher prices
• foreign producer revenue falls = caps how much can be exported into the market
• domestic demand contracts = quota reduces the quality of cheaper imports

Question 6

Subsides to domestic producers

Answer 6

• lowers the cost of production for domestic firms
• increase output and lower prices
• goods/services are more competitive
• increase domestic employment

Question 7

What impact does tariff have on domestic producers?

Answer 7

• lower prices imports = increase in output
  -producers surplus increased

Question 8

What impact does tariff have on domestic consumers?

Answer 8

• domestic consumer surplus has decreased
• as there are higher prices

However, depends on the price elasticity of the good/service

Question 9

What impacts does tariff have on gov

Answer 9

• they gain tax revenue

Question 10

What impact does tariff have on foreign producers?

Answer 10

• the revenue falls = as demand is contracting
• selling fewer exports after tariff

Question 11

What impact does quotas have on domestic producers?

Answer 11

• increases output
• increase price
• increase revenue

Question 12

What impact does quotas have on foreign producers?

Answer 12

• decrease output
• caps how much can be exported

Question 13

Impact of quotas for consumers?

Answer 13

• higher prices = decrease in consumer surplus
• less choice

Question 14

Impact of quotas on the gov

Answer 14

• don’t receive revenue