protectionsim

Question 1

Protectionsim

Answer 1

-Government policies and actions taken to restrict or limit international trade

Question 2

Why protectionism is used

Answer 2

-Protect domestic employment: domestic firms can make higher profits which can be passed onto workers-positive multiplier effect, protect from global competition outcompeting local firms -reduce structural unemployment

-Protect infant industries in developing countries: Protect from foreign competition/ establish industries that are more efficient which pose the risk of outcompeting local businesses.

Protect industries from other countries using subsidies/ dumping: dumping can drive firms out of the market - anti dumping laws block imports sold below the cost of production.

Environmental concerns: Large multinational corporations often shift their production to lower income countries to take advantage of lower environmental protection standards and maintain higher profits - less taxes on use of resources

Question 3

Forms of protectionism

Answer 3

Tariffs: tax on imported goods

Domestic subsidies: grant given by government to domestic firms - lowers COP

Quotas: physical limit on number of imported goods

Regulations: A law dictating how something is produced

Question 4

Tariff analysis

Answer 4

• Without tariffs, consumers import the goods from abroad at price Pw
  -This is cheaper than the domestically produced good (Pd) so there will be excess demand for that good
  -This excess demand is met by importing the good from abroad

-The tariff raises the price of import from Pw to Pw+t which means domestic demand for imports contracts from Q4 to Q3.
-Domestic producers are protected from foreign imports and can effectively raise their price.
-This incentivises domestic production - extenstion in supply from Q1 to Q2.
-Imports fall

The tax also raises government revenue

Question 5

Welfare analysis of tariff

Answer 5

Consumers lose surplus:
Higher price lower quantity consumed reduces consumer surplus.

Domestic gain surplus: Dfirms more competitive
They can raise their prices too.
Producer surplus increases

Gov gain surplus:
Transfer of welfare from consumer to the government.

Loss of total surplus/welfare:
Area of consumer surplus not redistributed to the producer or the government are deadweight welfare loss
Domestic firms benefit without any improvements to productivity
Disincentivise firms to become as competitive/efiicient as foreign producers

-May create inflation as consumers are paying higher prices
-If tariff is imposed on raw material, firms COP increase leading to cost push inflation

-Increased employment- higher incomes