restrictions on free trade 4.1.6

Question 1

Define trade protectionism?

Answer 1

Protectionism is defined as protecting domestic industries from competition abroad through putting restrictions on imports

Question 2

Explain the free trade diagram?

Answer 2

• start by drawing a normal supply and demand curve
• then draw a horizontal supply curve and name it as PW at the first point and then end of the line write SW
• then draw another horizontal supply curve above and write the first point as PW+Tariff and the other end as SW+tariff

Question 3

Explain the significance of this free trade diagram?

Answer 3

• The world supply have got comparative advantage
• it is able to charge lower prices in the domestic market
• supply is perfectly elastic because the level of quantity that need to be best supplied in this domestic market.
• the rest of the world can supply happily at low levels of quantity at the same price.

Question 4

At pw which is the lowest world price what would they supply at and for demand?

Answer 4

They would supply at q1

they would demand at q2

Question 5

What would happen at q1 and q2?

Answer 5

• q1 is being supplied domestically at this low price of PW

- Q2 is demanded but there’s excess demand

Question 6

How would they ration this excess demand?

Answer 6

In order for them to ration this excess demand they will have to rise the prices but since there’s a world price there’s no chance to higher the prices so the rest is going to be imported.

Question 7

What could be the possible reasons why the gov may want to reduce imports?

Answer 7

1. infant industry
2. dumping
3. domestic employment
4. low cost labour
   - gov revenue rising
5. improve ca position

Question 8

Explain the details of the curve?

Answer 8

vertical distance between sw and sw+tariff is the actual value of the tariff-it will raise the prices
since now the prices are rising there will be an extension of the supply curve and contraction of the demand curve
this means less consumers are willing and able to buy the product
new q1 and q2 will be q3 and q4 there’s a less distance between the two points meaning that excess demand has been reduced
imports have squeezed
green box represents the tariff generated for the gov- the vertical distance between the supply curve shows the value of the tariff
the red triangle shows the deadweight loss to consumer surplus
but the total deadweight loss is shown by the trapezium

Question 9

what is a tariff

Answer 9

tariff is a tax imposed on imports to limit it.

Question 10

key point to remember about the purpose of the tariff?

Answer 10

anytime a tariff is imposed on imports it will shift the supply curve upwards.

Question 11

the triangle is the main key component in this diagram what does each section represent

Answer 11

• middle square represents tariff revenue
• left side of the triangle represents the deadweight loss welfare
• the right-hand side of the triangle represents the deadweight consumer loss

Question 12

why is there a loss of efficiency?

Answer 12

since now it has the main focus is domestic suppliers producing extra units of goods from q1 to q3 there is a loss of efficiency because there is an artificial price advantage.