Chapter 20.1 Flashcards
What is import substitution?
It is an inward-looking strategy of economic growth and development that encourages domestic production and the purchase of domestic output through protectionist policies such as tariffs and quotas. It is a development strategy often used to protect infant industries from larger foreign producers.
What may be the possible drawbacks of import substitution?
-consumers pay higher prices, so there is a loss of consumer surplus
-detrimental to economic efficiency
-reduce the competitiveness of domestic firms in the long run, thereby reducing the attractiveness of exports
-cause other countries to retaliate and impose their own barriers to international trade
What is export promotion?
Export promotion is an outward-looking strategy of economic growth and development through international trade with overseas customers. Countries that adopt an outward development strategy tend to benefit from increased specialization and a greater choice of goods and services being available. Export promotion generates foreign currency earnings in order to pay for the country’s import expenditure
What are the benefits of export promotion?
Exposes domestic firms to foreign competition, possibly resulting in greater efficiency, higher productivity and relatively lower production costs
What are the drawbacks of export substitution?
Exporters in developing countries usually face stiff competition from other countries, and may struggle to compete against larger and well-established foreign multinational companies. High income nations may impose protectionist measures in order to discourage export promotion from developing countries
What are regional free trade agreements?
Regional groupings allow countries to expand their markets (achieving economies of scale) and to diversify production and exports.
What is the benefit of FTAs?
When countries are at a similar level of development with similar technological capabilities as well as similar market sizes, the new competition created by increased imports is more “fair” and easier to deal with.
What are bilateral trade agreements?
Bilateral trade agreements are preferential international trade deals between 2 countries that strive to reduce and/or abolish trade barriers such as tariffs and quotas
What is a disadvantage of BTAs?
A potential disadvantage of bilateral trade agreements is that foreign goods from the partner country could be more appealing to consumers, thus causing problems for domestic firms.
What is trade liberalization?
Trade liberalization involves the freeing up of international trade without government interference in the exchange of goods and services across borders, for example the removal of tariffs and quotas
What is the benefit of trade liberalization?
The argument for trade liberalization is based on the notion that free trade and market forces improve the global allocation of resources, thereby improving economic efficiency. In turn, this leads to economic growth and development.
What is a disadvantage of trade liberalization?
-unemployment
-social welfare losses due to less government involvement
