Chapter 6 Flashcards
What is commercial policy?
Tariffs and quotas
What is protectionism?
The policy of restraining trade through tariffs, quotas and other measures which burden foreign producers and not domestic ones
What is partial equilibrium analysis?
Effects of tariffs and quotas on only a part of the economy
What is a tariff?
Tax on imports
What is a quota?
Physical limit on import quantity
Why are tariffs and quotas beneficial?
Production at home country increases
Consumption switches from foreign goods to domestic
Imports decline
What is consumer surplus?
Difference between what the consumer is willing to pay and what they have to pay
What is producer surplus?
Difference between the price the seller receives and the lowest price they are willing to accept
What are costs of tariffs?
Retaliation by other countries
Innovation:
- tariffs on imported machinery may slow the adoption of new techniques
- protection reduces incentives to increase productivity, improve products
Rent seeking:
- Firms spend time and money seeking protection rather than increasing productivity
What is a deadweight loss?
Destruction of consumer or producer surplus that is not matched by a gain
What is an efficiency loss?
Deadweight loss on the production side
What is the nominal rate of protection?
Rate levied on a product
What is the effective rate of protection?
% change in the value added after the tariff is levied
What is value added?
Difference between the price the good is sold for and the cost of producing it
How do you calculate the effective rate of protection?
(VAt-VA)/VA
VA = domestic value added with free trade
VAt = domestic value added after all tariffs
What is the difference between a quota and a tariff?
Quotas do not generate revenue
Quotas does not increases prices
Quotas can increase foreign profits - quota rents
Tariffs increase prices
What are similarities between quotas and tariffs?
Reduce imports
Increase domestic prices, reduce consumption and increase domestic production
What are quota rents?
Extra profits earned by producers/importers who have the right to import a limited quantity of goods under a quota
What happens when a tariff is imposed?
Foreign producers can still increase their share of the market by becoming more efficient
What happens when a quota is imposed?
Reduced imports, higher domestic prices, and a shift towards domestic production
This can benefit domestic producers by limiting competition from foreign suppliers, but it can also lead to reduced consumer choice and higher costs
What are types of quotas?
Limitation in the quantity of imports
Voluntary export restraints
Import licensing requirement
What is voluntary export restraints?
Agreements between an importing and exporting countries to voluntarily limit exports
What are import licensing requirements?
Requirements that any importer must obtain a license; total number is limited
What are nontariff barriers?
Quotas and nontariff measures
