International Economics

Question 1

Define tariff

Answer 1

A tariff is a tax on imports – it is paid by the company wanting to sell goods and services into an economy that is not their own and is received by the government of the host country

Question 2

Define quota

Answer 2

A quota is a maximum number of goods that can be imported – once the maximum has been reached, then it is possible for a firm to sell above that number but they may be penalised with a tariff or other restriction

Question 3

Define non-tariff barrier

Answer 3

A non-tariff barrier (NTB), is something that makes trade costlier or difficult, but which is not a tariff. For example, health and safety regulation on imported goods, domestic subsidies, or government procurement policies that favour domestic firms.

Question 4

Define voluntary export restraint agreements

Answer 4

This is like a quota but it is self-imposed by the exporting country rather than the importing country – they do this in order to avoid worse tariffs or quotas

Question 5

Explain the benefits of removing tariffs (diagram)

Answer 5

When the tariff is removed the price to consumers falls from Pworld + Tariff, to Pworld, and the consumption of this good will increase from Qd2 to Qd which will lead to an increase in consumer welfare.

Question 6

Define protectionism

Answer 6

Protectionism is when a government imposes trade restrictions on other countries

Question 7

Identify and explain 4 reasons why a country uses protectionist policies, use an example where possible to help you explain

Answer 7

i. To protect domestic jobs from structural unemployment, e.g. protecting jobs in the domestic car industry by subsidising domestic producers
ii. To generate government revenue e.g. for developing countries this could be an important source of tax revenue to invest in supply side policies
iii. To protect infant industries, e.g. the computer industry in Brazil was protected whilst this industry grew to a size where economies of scale could be achieved such that this company could withstand international competition
iv. Strategic products such as food are often protected as the country may need to remain self-sufficient in some products in case of conflict

Question 8

Explain 4 disadvantages of protectionism (you should use the tariff diagram to strengthen your explanation)

Answer 8

i. It reduces total consumption in an economy from Qd to Qd2
ii. There is a deadweight loss represented by the shaded triangles which reduces
consumer and social welfare
iii. It could lead to retaliation or tariff wars
iv. It means consumers pay higher prices from Pworld to Pworld + Tariff