Trade Flashcards
What is free trade
Free trade is when there are no barriers to importing and exporting goods (no protectionism)
What are the benefits of free trade
More consumer choice in goods and services with potentially better quality
Higher output and higher GDP – Costs will be lower as competing against the world.
Higher employment
Specialisation – In goods and services in which it has a comparative advantage and importing the others.
Economies of scale – by increasing its output, lower unit costs may be achieved.
Efficiency – The competition which arises from international trade acts as an incentive to domestic firms to increase their competitiveness
There are political, social and cultural gains from bringing countries closer together.
3 drawbacks from free trade
Dumping can occur when imports are made and sold at lower prices of production
Transport costs may make it more expensive to trade, even if a country has a comparative advantage
As there is more competition for domestic markets, this can put out domestic industry’s
What are the 2 other drawbacks of free trade
Increasing international trade can lead to a large balance of payments deficit.
Some countries may indulge in unfair trade practices
What is protectionism
Protectionism refers to government policies that restrict international trade to help domestic industries.
What is a tariff
Tariffs is a tax on imports and is used to restrict imports and raise revenue for the government, this helps domestic businesses.
What is the tariff revenue equation in a tariff diagram
Tariff revenue = tariff price difference × q. of imports
What is an import quota
An import quota directly reduces the quantity of a product that is imported and indirectly reduces the amount of money that the export producers receive,
What is an export subsidy
An export subsidy is a payment to a domestic producer who exports their products abroad.
If receiving an export subsidy a firm can remain competitive abroad by exporting up to the foreign price
What is an embargo
– This is a total ban on a good, this may be done to stop dangerous substances
What are unfair trade practices
An unfair trade practice is practices which may include scamming, misinformation etc.
What is a balance of payment deficit
A balance of payment deficit is when there are more imports than exports
What is diseconomies of scale
When production costs increase
What is consumer choice
Consumer choice is how much a consumer can choose from
What is specialisation
the process of an organization concentrating its labor and resources on a certain type of production to be more efficient and create a comparative advantage for an economy
An example being Russia and oil production
Benefits of protectionism
Infant industry argument
Protection against dumping
Improving the balance of payments
Externalities and import control
Drawbacks of protectionism
Loss of economic welfare
Firms protected from competition have little incentive to reduce production costs
Exporters will fall in demand causing less output and increasing unemployment
Protectionism can cause retaliation
What is Infant industry argument in protectionism
protect new industries against free trade. Protectionism can enable some industries to survive.
What is dumping in
Protectionism
(Refers to the sale of a good below its cost of production) In the short term this benefits consumers from lower prices but in the long term persistent undercutting of domestic prices will force the domestic industry out.
Explain externalities and import control in protectionism
Protectionism can be used to deal with externalitys and de-merit goods (alcohol, tobacco) set high tariffs for theses goods or ban them altogether
What happens to trading when there is retaliation as of protectionism
higher import prices and higher consumer prices.
Explain economic welfare loss in protectionism
Welfare reduced through higher prices and restricted consumer choice
