Protection

Question 1

protection

Answer 1

any artificial advantage given by a country’s government to domestic industries in order to protect them from international competition

Question 2

reasons for protection

Answer 2

infant industries - cannot compete against multinationals who benefit from economies of scale
dumping
domestic employment
defence - in the event of a conflict, they will be self sufficient

Question 3

main methods of protection

Answer 3

tariffs
subsidies
quotas
local content rules
export incentives

Question 4

tariffs (definition and effects)

Answer 4

a tax on imports which raise the price of imported goods so that local producers are more competitive
stimulate domestic protection and employment
government gains revenue
may decrease imports, improving ToT and lowering the CAD
may lead to imported inflation
may lead to retaliatory tariffs on domestic imports, nullifying the positive effect of the initial protection

Question 5

subsidies (definition and effects)

Answer 5

form of financial assistance paid to domestic producers to allow them to increase supply

offer a price advantage for local consumers due to less inflationary pressures
easier to remove than a tariff
distort resource allocation as they support inefficient industries
may increase the tax burden on the government
direct cost on govt. budgets

Question 6

quota

Answer 6

quantitative restriction on certain categories of imported goods
same impacts as tariff minus government revenue

Question 7

local content rules

Answer 7

specify that a certain percentage of the product must be manufactured domestically

Question 8

export incentives

Answer 8

give domestic market producers assistance to encourage businesses to penetrate global markets and expand market share

Question 9

effect of protection on domestic economy

Answer 9

distorts resource allocation and income distribution, leading to a shift to less efficient firms over long term
may increase inflation as a result of tariffs
may slow economic growth as resources are not used efficiently
exports may be lower

Question 10

effect of protection on global economy

Answer 10

reduce access to markets as developing economies are often excluded from access to the markets of advanced economies
international trade barriers tend to harm developing economies causing an increase in income inequality between nations
global political tensions and retaliatory effects may increase due to a lack of harmonious trade and economic relations
reduced trade and economic growth