Trade

Question 1

When does protectionism occur

Answer 1

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

Question 2

Examples of protectionism

Answer 2

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

Question 3

What are tariffs

Answer 3

a tax or duty that raises the price of imported products

Question 4

What are quotas

Answer 4

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

Question 5

When does economic integration occur

Answer 5

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

Question 6

What are the 5 levels of economic integration

Answer 6

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

Question 7

What is a free trade area

Answer 7

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

Question 8

What is a customs union

Answer 8

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

Question 9

What is a single market

Answer 9

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

Question 10

What is a monetary union

Answer 10

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

Question 11

What is a monetary union

Answer 11

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

Question 12

What is an economic union

Answer 12

all members of the eurozone pursue a single monetary policy

Question 13

what does economic integration give

Answer 13

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

Question 14

Why is protectionism good

Answer 14

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

Question 15

Why is protectionism bad

Answer 15

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

Question 16

What odes the impact of protectionism depend on

Answer 16

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

Question 17

Explain the impact of a tariff

Answer 17

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.

Question 18

When does trade creation occur

Answer 18

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

Question 19

Explain the impact of trade creation

Answer 19

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

Question 20

When does trade diversion occur

Answer 20

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.

Question 21

Explain the impact of trade diversion

Answer 21

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.

Question 22

How is comparative advantage a benefit of free trade

Answer 22

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

Question 23

How is increased exports a benefit of free trade

Answer 23

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.

Question 24

How are economies of scale a benefit of free trade

Answer 24

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.

Question 25

How is increased competition a benefit of free trade

Answer 25

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

Question 26

How is increased trade a benefit of free trade

Answer 26

leads to economic growth

Question 27

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

Answer 27

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

Question 28

How is tariffs encouraging efficiency a benefit of free trade

Answer 28

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

Question 29

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

Answer 29

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

Question 30

What is dumping

Answer 30

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

Question 31

What is an absolute quota

Answer 31

physical limit on the number

Question 32

What is a tariff rate quota

Answer 32

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

Question 33

What is a tariff rate quota

Answer 33

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

Question 34

What is a voluntary export restraint

Answer 34

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

Question 35

Explain the impact of a quota

Answer 35

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).

Question 36

Quotas v tariffs

Answer 36

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)

Question 37

What is the WTO and what do they do

Answer 37

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

Question 38

WTO positives

Answer 38

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.

Question 39

WTO disadvantages

Answer 39

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