4.1.6 Restrictions to free trade

Question 1

Reasons for restriction on free trade: Infant industry argument

Answer 1

Protecting emerging industries until they have achieved economies of scale and a large consumer base.

Question 2

Reasons for reduction on free trade: Support domestic producers

Answer 2

Reduces foreign competition by making imported goods more expensive.

Question 3

Reasons for reduction on free trade: Sunset industry agreement

Answer 3

To slow the decline of old sectors to limit structural unemployment.

Question 4

Types of restrictions on trade: Tariffs

Answer 4

Taxes placed on imported goods.
-> Increases the relative price of imports.

Question 5

Types of restrictions on trade: Quotas

Answer 5

A limit on the total quantity of imported goods.

Question 6

Types of restrictions on trade: Subsidies to domestic producers

Answer 6

Payments to domestic producers to lower their costs.

Question 7

Types of restrictions on trade: Non-tariff barriers

Answer 7

-> Trade embargoes - total ban on imported goods.
-> Legal and technical standards - some products cannot legally be sold.
-> Voluntary export restraint agreements - agreement to limit the volume of exports to one another over a period of time.

Question 8

Impact of tariffs

Answer 8

Consumers
- A decrease in consumer surplus.
- After the tariff, consumers face higher prices which might have a regressive effect on low-income households more.

Domestic producers
- A rise in domestic producer surplus.
- After the tariff, high prices increase the number that are willing to supply the product, which increases domestic output, increasing domestic producer revenue.

Foreign producers
- A fall in foreign producer surplus.
-After the tariff, high prices make foreign products more expensive, this decreases domestic demand, decreasing foreign producer revenue.

Government
- A rise in tariff revenue generates revenue for the government.

Welfare
-Overall loss of economic welfare.
-The gains to government and domestic producers are outweighed by the loss of consumer surplus.

Question 9

Impact of quotas

Answer 9

Consumers

Domestic producers

Foreign producers

Government

Welfare

Question 10

Impact of subsidies to domestic producers

Question 11

Impact of non-tariff barriers