Free Trade & Protection Flashcards
Why is trade important
Trade expands a nations consumption possibilities by providing access to other countries productions through imports
Absolute Advantage
When a country can produce more of a good than another nation (largest output)
Comparative Advantage
When a country has the lowest opportunity cost when producing a good, relative to other nations.
Gains of specialization and trade
The total consumption and living standards are higher compared with self-sufficiency
Sources of comparative advantage
Determined by a nations resources and technological progress (human, natural & capital)
Protectionism
Any action taken by the government designed to give domestic producers an artificial advantage over a foreign producer
Goal of protection
To help domestic producers in the protected industries and reduce the consumption in import markets
Tariff
A tax placed on an Import
increases the price of the product and creates revenue for the government
Subsidies
Grants or payments made by the government to domestic producers
Quotas
Restrictions on quantities of a product being imported
Infant industry argument
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)
Diversification
Trying to increase a nations area of specialty
Anti-dumping
Overseas producers sells products below cost of production in order to push domestic produces out of the market.
Difficult to prove.
National Defense
Import barriers are essential to industries critical to wartime efforts
Increased Employment
shift consumption from foreign imports to domestically produced goods and services, therefore increasing employment in that industry.
Cheap Foreign
Labour
To protect Australian industries against cheap foreign labour.
Favorable Balance of Trade
Eliminate or reduce a trade deficit by restricting imports
WTO key principles
Trade should be free from discrimination (national treatment)
Most favoured nation status (all nations are to be given the best treatment)
Arguments for trade Liberalization
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
