4.4 Trade policies

Question 1

What is protectionism?

Answer 1

Protectionism is the economic policy of restraining trade between countries through methods such as tariffs, quotas, and subsidies.

Question 2

What are the types of economic integration?

Answer 2

• Free trade areas
• Customs unions
• Monetary unions
• Economic unions

Question 3

What is the impact of tariffs on trade?

Answer 3

Tariffs can create trade by making domestic goods more competitive and divert trade by increasing the cost of imports.

Question 4

What are the advantages of protectionism?

Answer 4

• Protects domestic industries
• Preserves jobs
• Reduces trade deficits
• Promotes infant industries

Question 5

What are the disadvantages of protectionism?

Answer 5

• Higher prices for consumers
• Retaliation from other countries
• Inefficiency in domestic industries
• Limited choices for consumers

Question 6

What is the role of the World Trade Organisation (WTO)?

Answer 6

• Facilitate trade negotiations
• Settle trade disputes
• Co-operate with other international organisations
• Create global trade rules

Question 7

What does LRAS represent?

Answer 7

LRAS represents Long-Run Aggregate Supply, indicating the total output an economy can produce when resources are fully employed.

Question 8

What does SRAS represent?

Answer 8

SRAS represents Short-Run Aggregate Supply, showing the total production of goods and services at different price levels in the short term.

Question 9

What are the components of AD?

Answer 9

• Consumer spending
• Investment
• Government spending
• Net exports

Question 10

What is a formula for calculating the multiplier?

Answer 10

Multiplier = 1 / (1 - MPC)

Question 11

What does MPW stand for?

Answer 11

MPW stands for Marginal Propensity to Withdraw.

Question 12

What is a negative output gap?

Answer 12

A negative output gap occurs when actual economic output is less than potential output.

Question 13

What does globalisation mean?

Answer 13

Globalisation refers to the process of increased interconnectedness and interdependence of economies, cultures, and populations.

Question 14

What are the parts of the current account on the Balance of Payments?

Answer 14

• Trade balance
• Income balance
• Current transfers

Question 15

What is recorded on the financial account?

Answer 15

The financial account records transactions that involve the purchase and sale of assets, including investments.

Question 16

What does the Marshall-Lerner condition tell you?

Answer 16

The Marshall-Lerner condition states that a depreciation of a currency will only improve the trade balance if the sum of the price elasticities of demand for imports and exports is greater than one.

Question 17

How do countries decide to allocate resources in the theory of comparative advantage?

Answer 17

Countries allocate resources based on the lowest opportunity cost of producing goods.

Question 18

Name two assumptions underlying the theory of comparative advantage.

Answer 18

• Resources are immobile between countries
• Perfect competition exists

Question 19

What is FDI?

Answer 19

FDI stands for Foreign Direct Investment, which is an investment made by a company or individual in one country in business interests in another country.

Question 20

Give a benefit to a developing country from globalisation.

Answer 20

Globalisation can lead to increased foreign investment and access to international markets.

Question 21

What are the three main types of protectionist policies or barriers?

Answer 21

• Tariffs
• Import quotas
• Export subsidies

Question 22

What are the benefits of a tariff?

Answer 22

• Increases government revenue
• Protects domestic industries
• Reduces trade deficits

Question 23

What are the costs of a tariff?

Answer 23

• Higher prices for consumers
• Possible retaliation from trading partners
• Inefficiency in domestic production

Question 24

What are the benefits of a quota?

Answer 24

• Protects domestic producers
• Helps stabilise prices
• Ensures supply of domestic goods

Question 25

What are the costs of a quota?

Answer 25

* Higher prices for consumers * Limited availability of goods * Inefficiencies of swapping to a domestic producer

Question 26

What are the benefits of an export subsidy?

Answer 26

* Increases competitiveness of domestic products * Supports domestic employment * Helps balance trade deficits

Question 27

What are the costs of an export subsidy?

Answer 27

* Can lead to trade disputes * Distorts market prices * Opportunity cost to the government of spending on sbisidies rather than on another policy.

Question 28

What is the definition of free trade?

Answer 28

Free trade refers to the absence of trade barriers or restrictions on foreign trade.

Question 29

What is trade creation?

Answer 29

Trade creation occurs when a country shifts its consumption from a higher-cost producer to a lower-cost producer within a trading bloc.

Question 30

What is trade diversion?

Answer 30

Trade diversion occurs when a country shifts its consumption from a lower-cost producer outside a trading bloc to a higher-cost producer within the bloc.

Question 31

What is a regional trading bloc?

Answer 31

A regional trading bloc is a group of countries within a geographical region that protect themselves from imports from non-members.

Question 32

What is a preferential trading area (PTA)?

Answer 32

A PTA is an agreement where tariff and trade barriers are reduced on some but not all goods traded between member countries.

Question 33

What is a customs union?

Answer 33

A customs union involves the removal of tariff barriers between members and the acceptance of a common external tariff against non-members.

Question 34

What is a common market?

Answer 34

A common market allows free trade in all economic resources and imposes a common external tariff on imports.

Question 35

What is a monetary union?

Answer 35

A monetary union is a group of countries that adopt a single currency and coordinate their monetary policies.

Question 36

What are the advantages of trading blocs?

Answer 36

* Increased specialisation * Economies of scale * Protection from external competition * Greater market access

Question 37

What are the disadvantages of trading blocs?

Answer 37

* Trade diversion * Protection of inefficient industries * Potential retaliation * Loss of national sovereignty

Question 38

What is the General Agreement on Tariffs and Trade (GATT)?

Answer 38

GATT was established to encourage countries to reduce tariffs and provide a forum for trade negotiations.

Question 39

What is the World Trade Organisation (WTO)?

Answer 39

The WTO is an international organization that replaced GATT in 1995, facilitating trade negotiations and settling disputes.

Question 40

What are the perceived disadvantages of the WTO?

Answer 40

* Perceived as undermining sovereignty * Long negotiations * Environmental concerns

Question 41

What is a currency union?

Answer 41

A currency union is when member countries adopt a single currency and harmonise their monetary policies.

Question 42

What are the advantages of a currency union?

Answer 42

* Reduced exchange rate risks * Easier price comparison * Increased trade

Question 43

What are the disadvantages of a currency union?

Answer 43

* Loss of monetary policy independence * Costs of transitioning to a new currency * Economic disparities among member countries

Question 44

What is an example of deepening economic integration?

Answer 44

The links between member countries in the EZ area

Question 45

What major event raised questions about the viability of currency unions?

Answer 45

The 2008 Global Financial Crisis (GFC)

Question 46

What do some economists argue is necessary before a monetary union?

Answer 46

Fiscal union

Question 47

What are the advantages of a currency union?

Answer 47

* Certainty of prices * Price transparency * No conversion costs

Question 48

What does 'certainty of prices' in a currency union imply?

Answer 48

No concerns over exchange rate fluctuations

Question 49

How does a currency union benefit firms?

Answer 49

It allows them to benefit from economies of scale

Question 50

What is a requirement for the benefits of a currency union to be realised?

Answer 50

Monetary policies within members having similar inflation rates

Question 51

What is a disadvantage of a currency union?

Answer 51

Loss of control over domestic monetary policy

Question 52

Who sets interest rates for the Euro area?

Answer 52

The European Central Bank (ECB)

Question 53

What can high interest rates during a recession cause?

Answer 53

Worsening of the economic situation

Question 54

What do countries rely on more when they cannot implement monetary policy?

Answer 54

Fiscal policy to stimulate the economy

Question 55

What is a consequence of increased government borrowing?

Answer 55

Crowding out private investment

Question 56

What does 'moral hazard' refer to in the context of stronger economies supporting weaker ones?

Answer 56

Higher taxes in stronger economies due to paying for government deficit in weaker economies.

Question 57

What is important when joining a currency union regarding exchange rates?

Answer 57

Joining at the right exchange rate to ensure competitiveness

Question 58

What can happen to UK firms if the UK is outside the EZ?

Answer 58

Loss of competitiveness and potential fall in aggregate demand (AD)

Question 59

What does loss of sovereignty mean for national governments in a currency union?

Answer 59

Less control over their own economies

Question 60

What is one argument against protectionism?

Answer 60

It may not always reduce unemployment

Question 61

Why could the adoption of the Euro cause problems for member countries?

Answer 61

It prevents independent monetary policy

Question 62

What role does the World Trade Organisation play?

Answer 62

Promoting freer world trade