Trade Policy, Performance and Conditionality

Question 1

benefits of trade

Answer 1

1) improves access to global market and permits increased production

2) trade encourages efficient allocation of resources

3) imports increases consumption possibilities

4) contributes to economic growth by generating long run gains

Question 2

challenges of trade

Answer 2

1) exporters face competitors on world market

2) competition from imports challenges local producers

3) imports can increase faster than exports, resulting in balance of payments deficit that imposes macroeconomic adjustments on economy

4) low income countries less able to respond to opportunities and adjustments

Question 3

define antidumping duty

Answer 3

protectionist tariff that a domestic government imposes on foreign imports that it believes are priced below fair market value

Question 4

what is the infant industry argument (IIA)

Answer 4

firms will not enter industries as competition from foreign firms render then currently unprofitable

Question 5

key conditions for IIA

Answer 5

• candidate must be positive net present value (NPV) industry
• normal operation of market won’t support establishment of industry
• trade policy intervention must be ‘best’ option

Question 6

what is a positive NPV industry

Answer 6

• will generate return greater than cost of support
• once considering social costs, industry must be very profitable to pass NPV test

Question 7

what is conditional lending

Answer 7

practice of associating set of policy reforms to receiving aid

Question 8

potential donor responses to conditional lending

Answer 8

1) entitled to monitor and improve how their aid is used

2) use conservable signals or prior actions to deny aid to bad type recipients

3) can target aid to specific sectors/projects