Restrictions on Free Trade Flashcards
Quota
A strict limit on the quantity of imports
Subsidy to Domestic Producer
Grants given to domestic producers by the government in order to encourage supply and reduce price. This will decrease demand for imports.
Non-Tariff Barriers
Restrict free trade by setting rules and regulations for imports to follow.
Examples of Non-Tariff Barriers
Health and safety regulations, environmental regulations and labelling.
What is predatory pricing?
Predatory pricing is when a firm aggressively cuts prices below average variable costs in order to force competitors out of the market.
how does dumping get prevented?
A trade barrier can be used to prevent dumping. For example, a tariff will increase the price of imported goods so that foreign firms won’t be able to undercut domestic firms by charging a lower price.
Infant Industry
New industries which do not benefit from economies of scale and can’t compete with larger industries from other countries.
What is the likely impact of a car quota in Algeria?
The car quota means that fewer goods are being imported which could lead to a shortage in supply. The car quota shouldn’t shift the demand curve. It may end up increasing the price of cars, which would lead to a movement along the demand curve.
What is a possible effect of a decrease in the quantity of Algerian cars being produced?
Fewer cars being produced will decrease the derived demand for labour in Algeria. Labour is in derived demand as it is demanded in order to produce something, a car in this case.
Reasons for Restrictions on Free Trade
A country may impose restrictions on free trade to; prevent dumping, protect domestic jobs, protect infant industries and improve health and safety standards.
Dumping
Dumping is where foreign firms aggressively cut their prices, below average variable costs, to force out domestic producers from a market.
Infant Industry
New industries which do not benefit from economies of scale and can’t compete with larger industries from other countries.
Why might infant industries require protection through a trade barrier?
Infant industries have high long run average costs as a result of a low output. They are new industries and so they are not yet producing enough to benefit from economies of scale. The government may use a trade barrier to protect them while they increase their output and benefit from economies of scale. This then enables them to compete with foreign firms.
