Topic 5: Political Economy of Trade Flashcards
When should a domestic industry export goods?
When world price is above the domestic price. WHY? Because then the firm will have the comparative advantage.
How do exports enhance the welfare of the domestic country when the world price exceeds domestic price?
Producer surplus increases more thank consumer surplus decreases (Producer wins more than consumer loses)
When should a domestic industry import goods?
When the world price is below the domestic price
How do imports enhance the welfare of the domestic country when world price is below domestic price?
Consumer surplus increases more than producer surplus decreases
What is a tariff?
Tax placed on imports - directly affects domestic price charged on imports
What are 4 results of tariffs?
- Higher domestic prices
- Under-consumption in the domestic market
- Over-production by domestic producers
- Less imports to the domestic market
What is a quota?
A maximum quantity placed on imports (indirectly affects domestic price by creating a situation of excess demand)
What are 4 results of quotas?
- Less imports to domestic market
- Under-consumption in domestic market
- Over-production by domestic producers
- Higher domestic prices
What are two major differences between tariffs and quotas?
- Tariffs raise revenue, but quotas do not
- Quotas can result in more inefficiency (resources spent on lobbying)
What are 4 reasons why nations adopt trade restrictions?
- National defense reasons
- Retaliation against dumping
- Infant Industry Argument
- Special Interests Influences
Do trade restrictions save jobs? What are some implications?
- Imports and exports are linked through income creation (Jobs lost in exporting industries)
- Import restrictions raise prices on inputs (Jobs lost in industries that rely on cheap imported materials)
- Jobs increase in domestic industry that has trade restrictions (but more industries become more inefficient)
