International Economics: 4.1

Question 1

Define trade protection

Answer 1

government intervention in international trade that involves the imposition of trade barriers to limit the quantity of imports and protect the domestic economy from foreign competition

Question 2

Define tariffs

Answer 2

taxes on imported goods

Question 3

Why impose trade protection measures?

Answer 3

• protect infant industries
• prevent dumping
• encourage domestic employment
• low-cost labor
• increase gov. revenue (tariffs only)
• improve current account position

Question 4

Define quota

Answer 4

The legal limit on the quantity of goods that can be imported over some time

Enforced by a limited number of quota licenses for exporting countries

Question 5

Define subsidies

Answer 5

Production subsidies = money paid to domestic firms per unit of output (to protect them from imports)

Export subsidies = subsidies granted to domestic producers only for the units they export to foreign countries

Question 6

What are administrative barriers?

Answer 6

obstacles to prevent imports through

• health and safety regulations
• red tape (excessive regulations to comply with) and time-consuming procedures
• specific technical standards

Question 7

Trade protectionism measures’ effects on stakeholders

Answer 7

Tariffs

• domestic consumers lose (CS reduces)
• domestic producers win (encourages domestic production, more revenue)
• domestic workers win (higher wages/employment)
• foreign producers lose (less import quantity)
• government wins (tax revenue earned)
• society loses (DWL)

Quota

• domestic consumers lose (CS reduces)
• domestic producers win (encourages domestic production, more revenue)
• domestic workers win (higher wages/employment)
• foreign producers neutral
• government neutral
• society loses (DWL)

Subsidies

• domestic consumers neutral
• domestic producers win (encourages domestic production, more revenue)
• domestic workers win (higher wages/employment)
• foreign producers lose (less import quantity/revenue)
• government loses (opp. cost)
• society loses (DWL)

Question 8

Definition of exchange rates