(Anna Copy) IPE Week 4

Question 1

What is international trade?
1.
2.

Answer 1

• The exchange of capital, goods, and services across international borders or territories.
• Involves the buying and selling of products and services between two or more countries.

Question 2

Why is international trade important?

• -

Answer 2

• In the age of globalization, nations worldwide engage in trade, leading to the development of international trade agreements such as the World Trade Organization (WTO)
• Countries rely on each other to import goods that may not be readily available domestically.
• It fosters economic development and promotes mutual benefit among trading partners

Question 3

What are the theories of trade?

3. 4.

Answer 3

1. Mercantilism
2. Adam Smith’s theory of absolute advantage
3. David Ricardo’s theory of comparative advantage
4. The Heckscher-Ohlin theory

Question 4

Mercantilist Theory:

Answer 4

Emphasizes promoting exports and limiting imports to increase a nation’s wealth and power.

Question 5

Adam Smith’s theory of Absolute Advantage:

Answer 5

Advocates for unrestricted free trade, where countries specialize in producing goods they can produce most efficiently.

Question 6

David Ricardo’s theory of Comparative Advantage:

Answer 6

Argues that countries should specialize in producing goods they can produce relatively more efficiently compared to other countries.

Question 7

The Heckscher-Ohlin theory

Answer 7

Focuses on differences in factor endowments between countries, such as capital and labor, to explain patterns of trade.

Question 8

What is the impact of trade on the environment?

-

Answer 8

• Shipping and aviation, essential for transporting goods globally, contribute to carbon emissions and climate change.
• Demand for natural resources, driven by the production of consumer goods, puts pressure on the Earth’s resources.
• Intensive farming for food production leads to soil degradation, biodiversity loss, and pollution of water systems.

Question 9

What are the political obstacles to trade liberalization?

• ## -

Answer 9

• Politically motivated governments may resist liberalization due to concerns about redistribution of resources.
• The costs of liberalization, such as job losses in certain industries, are more immediate and concentrated, leading to opposition from affected groups.
• The benefits of liberalization, such as lower prices for consumers, are diffuse and may not be immediately apparent to all stakeholders, making it politically challenging to implement.

Question 10

How does a tariff affect an open economy?
1.
2.
3.

Answer 10

1. A tariff, a tax levied on imported goods, affects an open economy by increasing the price of imported goods for consumers.
2. It leads to a decrease in imports and an increase in domestic production.
3. However, it can also result in higher prices for consumers and potential retaliation from trading partners.

Question 11

1. What is free trade
2. Why do governments often intervene in international trade?
3. How do they intervene

Answer 11

1. Free trade occurs when governments refrain from restricting what citizens can buy from or sell to other countries.
2. Despite nominal commitments to free trade, governments often intervene in international trade to protect the interests of politically important groups.
3. These interventions can take various forms, such as tariffs, subsidies, and import quotas.

Question 12

What are the main political arguments for government intervention in domestic markets?

3.

Answer 12

1. Protecting jobs
2. Ensuring national security
3. Retaliating to unfair competition

Question 13

What are the main political arguments for government intervention in domestic markets?

1. Protecting jobs
2. Ensuring national security
3. Retaliating to unfair competition

Answer 13

1. Governments may impose trade restrictions to protect domestic industries and jobs from foreign competition, especially when industries feel threatened by more efficient foreign producers.
2. Industries critical for national security, such as aerospace and defense, are often protected to maintain strategic capabilities.
3. Governments may retaliate against unfair foreign competition by imposing tariffs or other trade barriers, prompting other countries to remove their trade barriers.

Question 14

What are the main economic arguments for government intervention in markets?

2.

Answer 14

1. Strategic trade policy: Governments may intervene to help domestic firms attain first-mover advantages or overcome barriers to entry in strategic industries.
2. Infant industry argument: Industries may be protected until they become viable and competitive internationally, allowing them to develop and contribute to the economy’s long-term growth.

Question 15

What are the main instruments of trade intervention policy used by governments?

6. 7.

Answer 15

1. Tariffs
2. Subsidies
3. Import quotas
4. Voluntary export restraints
5. Local content requirements
6. Administrative policies
7. Antidumping policies

Question 16

What are the main instruments of trade intervention policy used by governments?

1. Tariffs
2. Subsidies
3. Import quotas
4. Voluntary export restraints

Answer 16

1. Taxes levied on imports to increase their prices and protect domestic industries.
2. Payments or benefits provided to domestic producers to reduce costs and promote competitiveness.
3. Direct restrictions on the quantity of certain goods that may be imported into a country.
4. Quotas on trade imposed by exporting countries at the request of importing countries.

Question 17

What are the main instruments of trade intervention policy used by governments?

5. Local content requirements
6. Administrative policies
7. Antidumping policies

Answer 17

5. Mandates that a specific fraction of a good must be produced domestically.
6. Bureaucratic rules designed to make it difficult for imports to enter a country.
7. Measures aimed at punishing foreign firms that engage in dumping, selling goods below production costs.

Question 18

What is trade facilitation, and how does it differ from tariffs in terms of government revenue?

Answer 18

• Trade facilitation refers to the simplification, standardization, and harmonization of procedures and information flows required to move goods from seller to buyer and facilitate payment.
• Unlike tariffs, which generate revenue for the government, trade facilitation measures do not directly contribute to government revenue

Question 19

Difference between the impact of trade facilitation and tariffs on domestic producers & consumers?

Answer 19

Both tariffs and trade facilitation can benefit domestic producers by increasing the cost of imported goods and leveling the playing field.

Consumers, on the other hand, may face higher prices due to tariffs, while trade facilitation measures can lead to cost savings and increased efficiency in the supply chain.