Trade Flashcards

1
Q

When does protectionism occur

A

when countries opt to improve restrictions on imports of goods and services from abroad

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2
Q

Examples of protectionism

A

tariffs, quotas, intellectual property laws (patents), technical barriers to trade(product labelling rules), subsidies

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3
Q

What are tariffs

A

a tax or duty that raises the price of imported products

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4
Q

What are quotas

A

quantitative (volume) limits on the level of imports allowed into a country

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5
Q

When does economic integration occur

A

when countries agree amongst themselves to abolish some (or all) protectionist measures on trade between them

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6
Q

What are the 5 levels of economic integration

A

free trade area, customs union, single market, monetary union and economic union

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7
Q

What is a free trade area

A

countries agree to eliminate tariffs and quotas on trade in goods between themselves e.g. NAFTA

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8
Q

What is a customs union

A

free trade area and all members impose a common external tariff on non-member countries

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9
Q

What is a single market

A

all members allow free movement of goods, services, labour and capital between each other

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10
Q

What is a monetary union

A

when members of union agree to operate single currency in their respective economies e.g. the eurozone

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11
Q

What is a monetary union

A

when members of union agree to operate single currency in their respective economies e.g. the eurozone

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12
Q

What is an economic union

A

all members of the eurozone pursue a single monetary policy

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13
Q

what does economic integration give

A

its protectionist and gives member countries an advantage over non-members.

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14
Q

Why is protectionism good

A

‘infant industries’ (helps them develop), reduce negative externalities (internalize social cost), protect jobs and improve the balance of payments, protects strategic industries, discourages dumping

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15
Q

Why is protectionism bad

A

distorts the market (higher prices, allocative inefficiency), productive inefficiency (low incentive leading to higher AC and x-inefficiency), regressive tariffs, trade wars

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16
Q

What odes the impact of protectionism depend on

A

short v long term, elasticity of demand for imports, moral arguments

17
Q

Explain the impact of a tariff

A

Government imposes a tariff creating a higher supply curve than without. Price is not PWT. The demand for lamb is 0Q3. Domestic supply is 0Q2. Imports are Q2 to Q3. Consumer surplus is PWTXY (increased), producer surplus is PWTAB (decreased) Tariff revenue is in-between Q2 and Q3. Areas G and H are welfare loss from imposition of a tariff.

18
Q

When does trade creation occur

A

when there is a reduction in tariff barriers from joining a FTA, leading to lower prices. The switch to lower cost producers lead to an increase in consumer surplus and economic welfare

19
Q

Explain the impact of trade creation

A

Price levels are reduced (lower supply curve). Consumer surplus increases by the areas 1,2,3,4. Producer surplus (UK producers) has lost area 1. Tariffs from previous imports has lost area 3 but there is a net gain of areas 2 and 4. Overall free trade deal has created more foreign trade. Imports have increased from Q2 - Q3 and are now Q1-Q4. A benefit from free trade

20
Q

When does trade diversion occur

A

trade being diverted from a more efficient exporter towards a less efficient one by the formation of a free trade agreement or a customs union, leads to a loss of economic welfare.

21
Q

Explain the impact of trade diversion

A

Originally bought good form low cost country (lowest supply curve). FTA made and now benefits from tariff free imports (middle supply curve). Original country with tariffs (highest supply curve). Consumer surplus of a, b, c and d gained by area a lost producer surplus. The loss of tariff revenue from new zealand is c and e. There will be a net loss from trade diversion id b and d (net gain in consumer surplus) is less than e (loss of tariff revenue). Net gain arises if b and d is gretaer than e.

22
Q

How is comparative advantage a benefit of free trade

A

specializing in goods where countries have a lower opportunity cost may increase economic welfare

23
Q

How is increased exports a benefit of free trade

A

Exporting goods where the UK has a comparative advantage will see increase in economic welfare. Higher quantity of exports, boost UK jobs and economic growth.

24
Q

How are economies of scale a benefit of free trade

A

specializing in certain goods, means firms that have high fixed costs and high levels of investment can beenfit from lower A and lead to lower prices and greater efficiency.

25
Q

How is increased competition a benefit of free trade

A

domestic firms face competition from abroad, more incentive to cut costs and increase efficiency. Prevent domestic monopolies from charging too high prices

26
Q

How is increased trade a benefit of free trade

A

leads to economic growth

27
Q

How is making use of a surplus of raw materials a benefit of free trade

A

can maximise benefit from raw materials e.g. Qatar and oil.

28
Q

How is tariffs encouraging efficiency a benefit of free trade

A

if an economy protects its domestic industry using tariffs they may have no incentive to cut costs, without tariffs there is an incentive

29
Q

Why are the supply curves perfectly elastic for trade diversion diagrams etc

A

because at this price, the world can supply any amount of product we need

30
Q

What is dumping

A

selling items below cost price in order to harm producers in the country to which you are exporting

31
Q

What is an absolute quota

A

physical limit on the number

32
Q

What is a tariff rate quota

A

allow a certain number of imports to gain a discount on the usual tariff rate

33
Q

What is a tariff rate quota

A

allow a certain number of imports to gain a discount on the usual tariff rate

34
Q

What is a voluntary export restraint

A

government limits the amount of exports from one country to another for a particular type of good

35
Q

Explain the impact of a quota

A

There is a fall in imports of Q4-Q1 to Q3-Q2. Domestic suppliers gain more revenue , price rises from PW to PQ (supply curve SQ above SW) and domestic suppliers supply more Q1 to Q2 creating more domestic jobs. Consumers pay a higher price so total quantity falls from Q4 to Q3. Net welfare loss to society because producer surplus is outweighed by the decline in consumer surplus .World exporters make less revenue (unless demand is v inelastic).

36
Q

Quotas v tariffs

A

Quotas tend to cause a bigger fall in economic welfare, quotas allow country to be certain on the numbers coming in, tariffs more unknown (dependent on ped). Quotas harder to enforce and more unfair (some firms may dislike uncertainity)

37
Q

What is the WTO and what do they do

A

World trade organization an helps producers, importers and exporters conduct their business more effective and easily and sets the rules for trading between countries.

38
Q

WTO positives

A
  1. MNCs have greatly benefited becoming much bigger and more powerful.
  2. Greater free trade and access to a wide range of goods has benefited consumers, particularly in developed countries more choice and lower prices.
39
Q

WTO disadvantages

A

There has been a decline in protectionism, have also led to big shift in manufacturing employment from developed countries to developing/emerging countries. Created structural employment. Benefited rich developed countries at the expense of poorer countries