The Globa Economy l

Question 1

Benefits of free trade

Answer 1

• permits specialisation of resources increasing output and levels of consumption
• improves the allocation of resources
• increases competition, lowering domestic monopoly power
• leads to lower prices and improved quality
• forces firms to cut waste and become more efficient
• presents consumers with greater variety
• permits technology and ideas to spread faster

Question 2

Monopoly

Answer 2

When a market is dominated by one firm and high barriers to enter it exist

Question 3

Free trade agreement

Answer 3

When 2 or more countries phase out or eliminate tariffs between them while maintaining existing barriers to non-members

Question 4

Tariff

Answer 4

A tax on imports aimed at protecting domestic firms and jobs

Question 5

Quota

Answer 5

A quantitative restriction of imports aimed at protecting domestic firms and jobs

Question 6

Protection Subsidy

Answer 6

A per unit payment by the government on all units of the good produced by a firm, leading to a decrease in their production costs

Question 7

Export subsidy

Answer 7

A per unit payment by the government to firms based only on the units of output exported

Question 8

Administrative barriers

Answer 8

Regulations that result in a lower level of imports into a country

Question 9

Protectionism

Answer 9

A set of policies with the aim of shielding a country’s domestic industries from foreign imports

Question 10

Non-economic arguments in favour of protection

Answer 10

• to ensure that in case of a conflict a country is self-sufficient in the production of crucial goods for strategic reasons
• to restrict imports of drugs and other harmful substances used to pressurise and weaken politically unfriendly countries.
• to protect a way of life or their cultural identity as part of a broader social strategy
• to ensure that certain minimum safety and health standards are met

Question 11

Economic arguments in favour of protection

Answer 11

• to protect domestic jobs; cheap foreign labour is typically blamed for the resulting higher rates of unemployment
• to improve a trade deficit- protection will render imports more expensive and less attractive. Spending on imports will then decrease shrinking and correcting the trade imbalance
• to assist the growth of certain industries in their initial stages of development. The idea is that once those industries acquire the necessary know-how and lower their unit costs they will be able to meet international competition
• the WTO permits a country to impose tariffs on a good if dumping is suspected.
• provide governments with revenues
• help a developing country diversify its production and export base

Question 12

Arguments against protection

Answer 12

• protection breeds inefficiency as a result of less competition and greater monopoly power, leading to waste and misallocation of resources
• greater monopoly power for domestic forums implies higher prices for buyers.