macro jan 2023

Question 1

Why would a country impose tariffs?

Answer 1

Protects sunset industries
- hence also protecting unemployment
- maximises government revenue (tax and tariffs)
- BUT industry may not even have CA anymore, no point in tryna save
- BUT retaliation is likely
Protects against dumping
- Perhaps the only valid justification
- Tariff diagram to explain
- BUT retaliation and WTO sanctions
Environmental Protection
- Import of highly polluting goods can be decreased
- If good is price inelastic, almost guaranteed govt revenue
- Govt rev to go towards clean up eg subs
- BUT long term, hard to measure success, retaliation

Question 2

Decline for econ growth?

Answer 2

Loss of CA in manufacturing
- other countries offer cheaper labour, firms move there
- causes fall in investment so AD shift left
Exports fall/ X-M falls/Capital flight
- All are withdrawals from circ flow/AD left shifts

Question 3

Expansionary policies to boost econ growth?

Answer 3

New infrastructure:
-LRAS shift right
-Greater mobility allows human capital movement (higher geo mobility)
-Utilities such as water and gas can benefit business, promoting entrepreneurship
-Provide short term employment
-BUT very expensive to build, very long term, opp cost, govt debt raised

Interest rates:
-AD shift right as consumption decrease as return on borrowing goes up
-consumption goes up
-firms have easier access to capital to expand (LRAS shift)
-BUT could lead to capital flight, consumption may be done on imports hence X-M goes down.

Question 4

Trading Bloc Benefits

Answer 4

Lower Prices - no tariffs within member countries
More Comp and Choice - Free flow of goods forces innovation, low X-inefficiency, dynamic efficiency
Larger Market offers EoS
Boost direct investments as capital is free to flow
Access to cheap capital
Increased bargaining power
Growth of one country affects all
Movement of human capital

Question 5

Trading Bloc Cons

Answer 5

Domestic Industry suffers - unemployment created
Loss of sovereignty - bloc’s decision may go against national interest
Trade diversion - Inefficient countries can still survive and are protected from competition
Retaliation from other trade blocs

Question 6

Methods of protectionism

Answer 6

Tariffs
Quotas
Export Subsidies
Embargoes
Red tape

Question 7

Cons of Protectionism

Answer 7

Loss of allocative efficiency
- consumers pay more, less choice
- firms have little incentive to innovate and lower costs of production
Extra cost on exporters
- could lower output and damage economy
Most damaging to those on low incomes (inequality goes up)