Free Trade and Protectionism

Question 1

Define ‘free trade’.

Answer 1

International trade that is conducted without any restrictions

Question 2

What are the 5 advantages of free trade?

Answer 2

Lower prices
Increased choice for consumers
Wider markets for businesses
Provides new job opportunities 
Cultural tolerance

Question 3

What are the 5 disadvantages of free trade?

Answer 3

Competition for domestic businesses - can’t compete with MNCs, shut down
Overspecialisation
Wastage of resources
Overreliance on imports - current account deficit

Question 4

What are the 2 features of developing countries’ trade?

Answer 4

Focus on primary products

Dependent on market prices set by global demand and supply - can be volatile

Question 5

What are the 2 features of developed countries’ trade?

Answer 5

Focus on exporting manufactured goods and services

More ability to set prices - export revenue tends to be more stable

Question 6

Define ‘protectionism’.

Answer 6

The restriction of free trade/protection against imports

Question 7

What 6 reasons do countries use protectionism for?

Answer 7

Preventing a current account deficit (X < M)

Helping infant industries grow

Protecting jobs and small businesses

Preventing ‘dumping’ of foreign goods

Generating government revenue

Offsetting low wage competitions from LDCs

Question 8

Define ‘infant industries’.

Answer 8

New industries yet to establish themselves

Question 9

Define ‘dumping’.

Answer 9

When an overseas firm sells large quantities of a product below cost in the domestic market

Question 10

What are the 7 disadvantages of protectionism?

Answer 10

Retaliation - can lead to trade wars

Unemployment if exports fall - labour is derived demand

May harm LDCs - stops access to rich markets

Loss of choice

Higher prices

Increased cost of production for firms importing raw materials

Cost-push inflation

Question 11

What are the 4 types of protectionism?

Answer 11

Tariffs
Quotas
Subsidies
Administrative barriers

Question 12

Define ‘tariff’.

Answer 12

A tax on imports

Question 13

How do tariffs reduce the level of imports?

Answer 13

Increases the price of imports, incentivising consumers to buy domestically

Question 14

What are the 2 advantages of tariffs?

Answer 14

Generates government revenue

Improves current account (X > M)

Question 15

What are the 2 disadvantages of tariffs?

Answer 15

Higher prices for consumers

Cost-push inflation

Question 16

What 3 factors does the effectiveness of tariffs depend on?

Answer 16

The product taxed
How long it is kept
Size of tariff

Question 17

Define ‘quota’.

Answer 17

A physical restriction on how many goods can be imported

Question 18

How do quotas reduce the level of imports?

Answer 18

Limits the number of goods imported to a country

Question 19

What are the 2 advantages of quotas?

Answer 19

More demand for domestic goods

Economic growth and employment (M↓, AD↑)

Question 20

What are the 2 disadvantages of quotas?

Answer 20

Expensive and difficult to monitor

Higher prices and less choice for consumers

Question 21

What 2 factors does the effectiveness of quotas depend on?

Answer 21

Size of quota

Type of good it is placed on

Question 22

How do domestic subsidies reduce the level of imports?

Answer 22

Reduces the price of domestic goods and makes them more attractive

Question 23

What are the 4 advantages of domestic subsidies?

Answer 23

Less likely to lead to retaliation
Improved quality of domestic goods - export-led growth
Increased employment
Improvement of current account

Question 24

What are the 4 disadvantages of domestic subsidies?

Answer 24

Costs government money - potential impacts on inflation
Opportunity cost
Takes time to work/not guaranteed
Inefficiency due to overreliance

Question 25

What 3 factors does the effectiveness of domestic subsidies depend on?

Answer 25

Size of subsidy
How long it is given for
Which industry receives it

Question 26

How do administrative barriers reduce the level of imports?

Answer 26

Added cost of compliance adds to foreign firms’ cost of production, reducing supply

Question 27

What are the 3 advantages of administrative barriers?

Answer 27

Unlikely to lead to retaliation
Easy to implement
Makes goods safer and better

Question 28

What are the 4 disadvantages of administrative barriers?

Answer 28

Expensive to monitor and enforce
Affects developing countries
Doesn’t generate revenue
Doesn’t restrict imports

Question 29

What 3 factors does the effectiveness of administrative barriers depend on?

Answer 29

How strict they are
How effectively they are monitored
How costly they are to enforce