macro 28 Protectionism

Question 1

define protectionism?

Answer 1

Government policies that restrict trade - (to help domestic firms).

Question 2

Define tariff?

Answer 2

Tax on imports

Question 3

Define quota?

Answer 3

A limit to the quantity that can be imported.

Question 4

What are 4 other types of imposing protectionism?

Answer 4

1. An export subsidy - grant given to domestic firms.
2. An embargo - a total ban on trade with a particular country.
3. Technical barriers of trade - RULES BASED. Laws and labels on the standards and products.
4. Capital control - restriction on the inflow and outflow of money.

Question 5

What are 6 reasons why countries engage in protectionism?

Answer 5

1. Infant industries - help new firm grow, such as electric cars.
2. Dumping - Firms sell goods below fair market price which leads to cheap imports, reducing demand for domestic goods.
3. Raise revenue - Tax revenue from tariffs. Increased demand for domestic goods which will also increase tax revenue.
4. Negative externalities - protect pollution levels caused by transport.
5. Macro objectives - Current account deficit/protecting jobs/environment.
6. Protect strategic industries - May use protectionism to safeguard industries that are important to a country. Eg: Weapon, water.

Question 6

draw and explain the tariff diagram.

Answer 6

Area 1 - gain in producer surplus.
Area 2 - welfare loss as units are produced at a higher unit cost.
Area 3 - Govt revenue.
Area 4 - welfare loss as people are rationed out of market.
Imports were Q4-Q1. After the tariff, imports fall to Q3-Q2.
Consumer surplus falls by 1+2+3+4.

Question 7

Who are the 3 winners from the imposition of tariffs?

Answer 7

Government - more tax revenue.
Domestic firms - more demand.
Environment - less demand for imports.

Question 8

Who are the 3 losers from the imposition of tariffs?

Answer 8

Importers - pay higher prices.
Domestic firms - COP increases.
Government - Retaliation will lead to a fall in exports.

Question 9

Draw and explain the quota diagram?

Answer 9

The market price is P world.
Quantity of imports is Q4-Q1.
This leads to a fall in imports to just Q3-Q2.
Domestic suppliers gain more revenue. The price rises to P2 and domestic suppliers supply more-Q1 to Q2.
2 welfare losses - There is still as shortage of goods. The goods produced after the quota are produced at a higher unit cost.

Question 10

draw and explain the export subsidy diagram?

Answer 10

Domestic firms supplied up to Q1.
The implementation of the subsidy lowered firms costs of production, shifting the domestic supply curve from Sd to Sd + subsidy.
Domestic firms increase output and market share from Q1→Q2.
Imports reduce from Q1Q3 → Q2Q3.
However, the subsidy is too small to influence world price as other countries are likely going to have a significant comparative advantage.

Welfare loss as there is a waste of scarce resources.

Question 11

What are 4 cases against protectionism?

Answer 11

1. Tariffs distort the market - increased prices, loss of consumer surplus, reduced choice. These go against the principle of comparative advantage.
2. Allocative inefficiency - artificial shortage.
3. Retaliation - Leads to a trade war.
4. Regressive - Low income suffer more as they pay a larger proportion of their income.