Free Trade & Protection

Question 1

Why is trade important

Answer 1

Trade expands a nations consumption possibilities by providing access to other countries productions through imports

Question 2

Absolute Advantage

Answer 2

When a country can produce more of a good than another nation (largest output)

Question 3

Comparative Advantage

Answer 3

When a country has the lowest opportunity cost when producing a good, relative to other nations.

Question 4

Gains of specialization and trade

Answer 4

The total consumption and living standards are higher compared with self-sufficiency

Question 5

Sources of comparative advantage

Answer 5

Determined by a nations resources and technological progress (human, natural & capital)

Question 6

Protectionism

Answer 6

Any action taken by the government designed to give domestic producers an artificial advantage over a foreign producer

Question 7

Goal of protection

Answer 7

To help domestic producers in the protected industries and reduce the consumption in import markets

Question 8

Tariff

Answer 8

A tax placed on an Import

increases the price of the product and creates revenue for the government

Question 9

Subsidies

Answer 9

Grants or payments made by the government to domestic producers

Question 10

Quotas

Answer 10

Restrictions on quantities of a product being imported

Question 11

Infant industry argument

Answer 11

Industry’s need protection until they mature and can take advantage of economies to scale. the industry becomes accustomed to this protection and cannot operate without (old age pension)

Question 12

Diversification

Answer 12

Trying to increase a nations area of specialty

Question 13

Anti-dumping

Answer 13

Overseas producers sells products below cost of production in order to push domestic produces out of the market.
Difficult to prove.

Question 14

National Defense

Answer 14

Import barriers are essential to industries critical to wartime efforts

Question 15

Increased Employment

Answer 15

shift consumption from foreign imports to domestically produced goods and services, therefore increasing employment in that industry.

Question 16

Cheap Foreign

Labour

Answer 16

To protect Australian industries against cheap foreign labour.

Question 17

Favorable Balance of Trade

Answer 17

Eliminate or reduce a trade deficit by restricting imports

Question 18

WTO key principles

Answer 18

Trade should be free from discrimination (national treatment)
Most favoured nation status (all nations are to be given the best treatment)

Question 19

Arguments for trade Liberalization

Answer 19

Increases real incomes and living standards
Increases efficiency through greater competition
Increases productivity through efficient resource allocation
Consumers gain through lower prices and a greater variety and quality of goods
Exporters gain through higher prices and increased market access
Domestic producers gain through lower input prices
Enables greater specialization and economies to scale
allows for investment which is major catalyst for economic growth