Problem Set 2 Flashcards
possible advantages of trade restriction:
(1) increased employment, (2) a possible
increase in revenues to the government in the form of higher tariffs, and (3) a possible increase in the
competitiveness of domestic producers
possible disadvantages of trade restriction:
(1) trade protectionism can in the long
term weaken the industry – without competition, firms can fail to improve their products and services
offered (2) possible retaliation and increase in trade restrictions
(3) consumers could potentially face less choices and higher prices.
what is protectionism?
Protectionism is a form of government restrictions and incentives that are specifically designed to help a
country’s domestic firms compete with foreign competitors at home and abroad. The rationale for such
policies can be economic or noneconomic in nature.
What is the unemployment argument for government intervention for trade?
Governments often want to have high employment as displaced workers often do not find jobs that
provide comparable compensation. Often unemployment benefits must be spent on living expenses
instead of job skill training for a new job. However, to limit imports to increase employment, the cost
must still be borne by the government.
What is the infant-industry argument? What are the rationale for this argument and what are
the pitfalls?
The infant-industry argument argues for protectionism by stating that a government should shield an
emerging industry from foreign competition by protecting it, either in forms of subsidies, tariffs, or
quotas. This argument assumes that the infant-industry requires government intervention for the
industry to grow. However, it may not be possible for the industry to thrive on its own, regardless on the
length of time it is allowed to develop under government protection
What is the industrialization argument? How does it differ from the infant-industry argument?
What are the rationale for this argument and what are the pitfalls?
Similar to the infant-industry argument, the industrialization argument argues for protectionism by
stating that a government should shield an industry from the importation of lower-priced foreign
products by protecting it, either in forms of tariffs or quotas. This argument assumes an industry
requires protection to bolster local competition. Import restrictions may in fact spur foreign direct
investment as firms may invest in manufacturing in a country to avoid these regulations. However, if the
industry is not able to grow and compete on the global level, local consumers will face the cost of paying
higher prices for those products.
What is the argument for government intervening to manage its economic relationship with
other nations?
Governments compares its economic performance to other countries and enact policies to improve its
relative position. In this regard, trade control can be used to improve the balance of payments, to gain
fair access to foreign markets, to bargain trade agreements, and to control prices. The policies enacted
by a government is dependent on its relationship with the other country as well as the other country’s
trade practices.
What are four non-economic rationales and describe them
The four noneconomic rational for government intervention in trade are a) maintaining essential
industries, b) practicing acceptable practices abroad, c) maintaining or extending spheres of influence,
and d) preserving national cultures. Governments may deem industries to be essential and apply trade
restrictions to protect them. Governments may also want to promote what they deem acceptable
practices by pressuring foreign governments to alter their stances on the issue at hand. Governments
may also want to use trade to maintain or extend their sphere of influences. Lastly, governments may
want to use government intervention to preserve their national culture by limiting exports of items
deemed to be a part of their national culture or limiting imports that that may conflict with their
domestic values.
What is the difference between a tariff and a quota? Do they produce different results
Both tariff and quota affect the quantity of products that are imported into a country. Tariff adds an
additional tax on a product that is imported. Tariffs affect the quantity of imported product indirectly by
putting a tax on that product. However, a quota puts a hard limit on the quantity of a product that can
be imported. While they do produce similar results, tariffs are more flexible as the quantity that is
imported, based on supply and demand, can be affected in the shifts in world price. Quota, on the other
hand, puts fixed limit on the quantity that is imported.
What is a subsidy? How do they affect trade?
Subsidy is a direct assistance by governments to boost competitiveness. There are many different types
of subsidies, but the most common types of subsidies are low-interest loans or tax breaks. Essentially,
the government is decreasing the cost of production for the firm in order to allow it to compete on the
global playing field.
