Chapter 37: Free trade and protection

Question 1

Reasons for globalisation

Answer 1

• Reduced transport costs
• Advances in communications
• Removal of trade restrictions

Question 2

Consequences of gloablisation

Answer 2

• Increasing competition
• Encouraging firms to locate some of their production in the most efficient locations
• Makingf eocnomies more susceptibel to external shocks
• Governemnt policy is constrained by globalisation
• Some workers may lose their jobs because of increased competition arising from the breaking down of barriers
• Ability of MNCs to shift production from branches in one country to other countries could cause structural unemployment

Question 3

Benefits for MNCs

Answer 3

• Producing in countries where products are sold rather than exporting reduces transport costs and enables them to keep in clsoe contact with the market
• Enables them to get around restrictions on imports
• Enables them to access cheaper labour and raw materials

Question 4

Benefits of MNCs

Answer 4

• Increase employment, output, and tax revenue
• Bring in new technology and management ideas
• Help development in infrastructure
• Increase employment

Question 5

Disadvantages of MNCs

Answer 5

• Prone to pollute
• Their size and ability to shift production may mean they can put pressur eon the governemnt to give them tax concessions and not penalise them for poor safety standards
• May drive domestic firms out of business
• Profits earned may be paid to shareholders in their home countries rather than being reinvested in the host country

Question 6

Benefits of free trade

Answer 6

• Allow countries to concentrate on what they are best at producing and hecne allow for an efficient allocation of resources
• World output, employment, and living standards should be higher if countries are able to exploit their comparative advantage fully
• Selling freely to a global market should enable firms to take greater advantage of EoS, raise competitive forces, and give them access to mroe sources of raw materials and components
• Lower prices for consumers, raise the quality, and also gain from greater choice

Question 7

Methods of protection

Answer 7

• Tariff
• Quota
• Embargo
• Exchange control
• Quality standards
• Extensive paperwork
• Voluntary export restraints
• Subsidies

Question 8

Reasons for protection

Answer 8

• Infant industries
• Declining industries
• Strategic industries
• Raising employment and improving trade position
• Protectino of industries from low wage competition
• Protection of industries from dumping
• Protecting industries from other forms of unfair foreign competition

Question 9

Consequences of protection

Answer 9

• Difficult to identify infant industries
• RIsk taht industries may become dependent on protection
• Owners of declining industrymay resist the removal of protection
• High risk of retaliation
• If other countries respond by imposing trade restrictions, the country will buy fewer imports but also sell fewer exports
• REstricting imports of raw materials may be harmful as it will raise costs of production for domestic firms