Free Trade and Protection Flashcards
Why do nations trade?
Trade is important because it can expand a nation’s consumption possibilities by providing access to other countries’ product through imports. Exporting increases a nation’s production, while importing increases consumption
Explain the difference between absolute and comparative advantage
A country is said to have an absolute advantage in the production of a good or service over another country if it can produce a greater quantity of that good with the same quantity of inputs. A country is said to have a comparative advantage in producing a good or service if it can produce that good or service at a lower opportunity cost than another country.
Who gains from exports and who loses?
The domestic producers gain, domestic consumers lose.
Who gains from imports and who loses?
Domestic consumers gain, domestic producers lose.
Explain why imports result in an increase in total surplus
Consumers gain from lower prices and increased consumption. Consumers gain more than producers lose, overall economic welfare is increased
Which is more important to the economy - exports or imports?
Both are just as important.
Explain why exports result in an increase in total surplus?
Domestic producers gain from higher prices and sell more. The producers gain more than consumers lose.
What factors determine a country’s comparative advantage?
Quantity and quality of the nation’s human, natural and capital resources, and technological progress
List 5 goods and services which Australia has a comparative advantage
iron ore, coal, education, education services and medical research
Define protection. What are the three broad types of protection?
Protection refers to any action by the government designed to give domestic producer an artificial advantage over a foreign producer. Protection aims to increase domestic production in protected industries and decrease the consumption of imported goods and services. The three main types of protection are tariffs, subsidies, and quotas.
Does protection result in a net gain or loss for society?
All forms of protection resumer in a net welfare loss for the economy
What is a tariff?
Tariffs are the most widely used protective measure. A tariff is simply a tax placed on an import designed to increase the price of the foreign good or service so that competing domestic industries receive a price benefit.
Which groups gain from tariffs and which groups lose?
Governments gain as the tax imposed raises revenue. Consumers lose due to higher prices and decreased consumption. Domestic producers in the protected industry gain, other producers lose.
How does a subsidy differ from a tariff?
Many favour subsidies as there is no direct adverse costs on consumers as they pay the same price and purchase the same quantity of the good.
Explain why a subsidy results in a deadweight loss
The cost is greater than the benefit
List and explain three arguments for protection
The infant industry argument: it is argued that infant or newly established industries need protection in their early years until they mature and can take advantages of economies of scale.
The national security argument: it is argued that barriers are necessary to protect those industries that are vital to the economy in case of a wartime emergency
The increased employment argument: protection will shift consumers spending from the foreign goods to the domestic good and therefore, increase employment in the protected industry.
Outline four arguments for trade liberalisation
Increases real incomes and living standards
Increases productivity through efficient resource allocation
Consumers gain through lower prices, greater variety and quality of goods
Exporters gain through higher prices and increased market access
What is the aim of the WTO? Explain the ‘most-favoured nation’ principle.
The WTO promotes trade liberalisation by helping to lower trade barriers and by discouraging ‘unfair’ practices such as export subsidies
What is a regional trade agreement?
Regional trade agreements imply both trade liberalisation and trade discrimination. They are favourable to increasing trade between the member countries by lowering or removing trade barriers
What is the purpose of a ‘trade bloc’?
A trade bloc is a group of countries that agree to reduce trade barriers between themselves but impose barriers on countries outside the bloc.
Distinguish between trade creation and diversion
Trade creation is removing trade barriers to increase the volume of trade. Trade diversion occurs when trade is diverted from a low cost producer outside the trade agreement, to a higher cost producer within the group
Why are bilateral trade agreements more common than multilateral agreements?
Multilateral trade agreements are difficult to achieve as it is hard to get all member countries to reach consensus in lowering trade barriers.
