Effects of Free Trade and Protection

Question 1

What is free trade?

Answer 1

A policy that does not restrict imports or exports

Question 2

What is trade liberalisation?

Answer 2

Removing protectionist policies to move towards free trade

Question 3

What are 4 benefits of free trade for a country?

Answer 3

1) Comparative advantage
2) Increased competition
3) Access to resources
4) Better living standards

Question 4

What is comparative advantage?

Answer 4

An economy’s ability to make a product at a lower opportunity cost than other economies

Question 5

True or false: Country A can produce cars more efficiently than Country B. This means that Country A has a comparative advantage in cars.

Answer 5

False

Question 6

True or false: Country A can produce 2 cars per person per hour, whereas Country B can produce 1 car per person per hour. This means that Country A has a comparative advantage in cars.

Answer 6

False

Question 7

True or false: When Country A produces a car, it gives up the potential to produce 2 robots. When Country B produces a car, it gives up the potential to produce 3 robots. This means that Country A has a comparative advantage in cars.

Answer 7

True

Question 8

True or false: When Country A produces a car, it gives up the potential to produce 3 robots. When Country B produces a car, it gives up the potential to produce 2 robots. This means that Country A has a comparative advantage in cars.

Answer 8

False

Question 9

Why is increased competition a benefit of free trade?

Answer 9

Domestic firms need to find ways to be more efficient to compete with imports, so they either:

1) improve efficiency (improving AS and international competitiveness); or
2) shut down and the economy’s resources (e.g. land, labour, investment) is reallocated to industries in which the country has a comparative advantage

Question 10

Why are better living standards a benefit of free trade?

Answer 10

Individuals can purchase cheaper imports, increasing how much they can purchase and consume

Question 11

What are 4 costs for a country of increasing free trade?

Answer 11

1) Structural unemployment
2) National defence
3) Infant industries
4) Dumping

Question 12

Why does free trade cause structural unemployment?

Answer 12

Industries that cannot compete with cheaper imports will shut down, causing people to lose their jobs and have skills that do not match the available jobs

Question 13

Why is the argument that free trade worsens unemployment disputed?

Answer 13

In the long-run, free trade should increase the economy’s aggregate supply and international competitiveness, leading to higher growth and employment

Question 14

Why does free trade risk worsening national defence?

Answer 14

Specialisation means that countries will not be ‘self-sufficient’ in producing essential products, such as food, medicine or military equipment

Question 15

Why is the argument that free trade worsens national security disputed?

Answer 15

With free trade, countries will be able to afford to buy more essential products than if it tried to inefficiently produce them all itself.
Also, with free trade, a country is less at risk of a sudden supply shock leading to shortages of essential products (such as if there was a drought in the country, they can still purchase food from other countries)

Question 16

What are infant industries?

Answer 16

Newly established industries

Question 17

Why might free trade prevent infant industries from growing?

Answer 17

New industries are small and have not achieved economies of scale, so have high costs and therefore cannot compete with large, international firms.
Without protection, new industries are unlikely to be able to expand to the point of being able to compete with the global firms that already exists

Question 18

Why is the argument that governments should protect infant industries disputed?

Answer 18

Governments that protect infant industries initially rarely remove protection when the industries get big enough to compete on their own

Question 19

What is dumping?

Answer 19

Firms selling their products in a foreign country for a cheaper price than they do in their home country, with the intention of driving producers in that country out of business and then raising prices again

Question 20

Why is the argument that governments should protect industries to prevent dumping disputed?

Answer 20

It is often hard to tell whether a foreign firm is dumping or whether foreign firm is just more efficient and cheaper than local firms

Question 21

What are 3 benefits of free trade for the global economy?

Answer 21

1) Specialisation leads to higher overall GWP
2) Economies of scale lead to higher overall GWP
3) Reduced poverty due to increasing exports from emerging economies

Question 22

What is economic development?

Answer 22

A sustainable increase in the overall standard of living in an economy

Question 23

What are some indicators of economic development?

Answer 23

Education levels
Life expectancy
Industrialisation
Poverty rates
Gini coefficient
Greenhouse gas emissions per capita
Air pollution
Water pollution

Question 24

What is HDI?

Answer 24

The Human Development Index is a number between 0 to 1, where the higher the number the better the level of economic development

Question 25

A country’s HDI is based on its levels of…

Answer 25

GDP per capita
Life expectancy
Education levels

Question 26

If a country’s life expectancy and education levels stayed the same, but its HDI improved, it means that…

Answer 26

The country’s GDP per capita must have improved

Question 27

Country A and Country B have the same levels of GDP per capita and education, but Country B has a higher HDI. Therefore…

Answer 27

Country B must have higher life expectancy

Question 28

Country A and Country B have the same levels of GDP per capita and HDI, but Country B has higher education levels. Therefore…

Answer 28

Country B must have lower life expectancy

Question 29

What are the features of an advanced economy?

Answer 29

High levels of industrialisation and economic development
High incomes
High service sectors

Question 30

What are the features of an emerging economy?

Answer 30

Rapidly changing from an agricultural to an industrial economy
High growth rates
Growth is often at the expense of worsening environmental sustainability and widening inequality

Question 31

What are the features of a developing economy?

Answer 31

Low levels of industrialisation and productivity
Low incomes and high poverty
Specialisation in agriculture
Reliance on aid
Often have high population growth

Question 32

What are 2 examples of emerging economies?

Answer 32

China and India

Question 33

What are 2 examples of developing economies?

Answer 33

Sudan

Afghanistan

Question 34

What are 3 domestic factors that cause some countries to be less developed than others?

Answer 34

1) Low labour productivity (lack of skills / education)
2) A lack of natural resources (or in some cases, so many natural resources that it leads to corruption)
3) Corruption (reducing the incentive to work hard, innovate or start a firm)

Question 35

What are 3 global factors that cause some countries to be less developed than others?

Answer 35

1) Agricultural protectionism and the failure of the Doha Round (so developing countries can’t export their products)
2) Regional trading blocs such as the EU exclude developing economies
3) Foreign investment rarely goes into developing economies due to the risk, so firms there cannot fund improvements in productive capacity

Question 36

What are the benefits of FDI and TNCs on a country?

Answer 36

1) Provides investment and technology (increasing AS)

2) Creates a demonstration effect (showing others in the country how to produce efficiently)

Question 37

What are the impacts of portfolio investment?

Answer 37

1) Provides funds for domestic firms to use for investment (increasing AS)
2) But it is volatile (foreigners may pull out funding if there is speculation that the economy is risky) which can cause a sudden and deep recession

Question 38

What are the costs for a country of receiving FDI or hosting TNCs?

Answer 38

1) Often only locates in countries where there are few regulations on labour and the environment, so causes a ‘race to the bottom’
2) Repatriates profits: lots of the profit is returned to foreign owners, rather than locals

Question 39

How has globalisation affected economic growth in the global economy?

Answer 39

It has caused global growth to increase overall, but growth within countries has been mixed

Question 40

How has globalisation affected income inequality in the global economy?

Answer 40

It has caused the gap between rich and poor countries to reduce significantly, but has widened inequality within countries

Question 41

What are some costs of globalisation for environmental sustainability?

Answer 41

1) Increased pollution from trade

2) Created a ‘race to the bottom’ where governments weaken environmental regulations to attract foreign business

Question 42

What are some benefits of globalisation for environmental sustainability?

Answer 42

1) Increased cooperation on environmental issues (such as the Paris Agreement)
2) Emerging countries can ‘leapfrog’ (jump from very old, polluting technology to very new, clean technology) because of technological developments made in other countries